Public sector banks: Falling bad loan levels show IBC is key

Updated: November 22, 2018 6:43:07 AM

RBI has made general announcements to address three broad issues. (1) RBI has relaxed complying with CAR (Capital Adequacy Ratios) requirements by one year by relaxing the final 0.625% CET-1 requirements (Capital Conservation Buffer).

The additional amount will help provide much-needed fund for micro, small and medium enterprises (MSMEs) and non-banking financial companies (NBFCs)that are facing cash crunch.Barring a few isolated incidents, such as IL&FS, we are not seeing any more sector specific issues that have not been recognised as impaired loans.

By Mb Mahesh

RBI has made general announcements to address three broad issues. (1) RBI has relaxed complying with CAR (Capital Adequacy Ratios) requirements by one year by relaxing the final 0.625% CET-1 requirements (Capital Conservation Buffer). (2) A restructuring scheme to address the stressed SME loans with aggregate loan facilities of up to Rs 250 million is likely to be announced. (3) RBI is willing to look at the PCA framework that is currently in place. The impact of the measures announced is likely to be some temporary relief, at best, for public sector banks. There are six public banks that are currently under and three public banks that are outside the PCA framework which are below the minimum threshold requirements (post the relaxation).

The capital infusion programme from the government, which has been the only source of capital for these banks, gets relaxed because of the revised framework. The government has probably received a relief of $1.7 billion because of the delay in transition as they would have had to infuse this capital by FY19. The overall capital infusion to meet the guidelines now stands reduced (assuming current CAR) to $2.7 billion as compared to $4.4 billion earlier. From a minority shareholder standpoint, this lowers the book value dilution, which has been the constant feature of these banks.

The corporate banks, largely led by public banks, have started to see a decline in fresh slippages. For the second consecutive quarter, we have seen a decline in net NPLs to the extent of ~15%. Gross NPLs has declined ~50 bps to 14% for public banks while net NPLs have declined ~80 bps from peak levels. Barring a few isolated incidents, such as IL&FS, we are not seeing any more sector specific issues that have not been recognised as impaired loans.

However, a bigger constraint, which has been putting a lot of pressure on banks, has been the provisioning requirements. The pace of resolutions has been painstakingly slow in this cycle as we have gone through multiple iterations before settling down through the IBC framework. However, this act is still evolving as it has been prone to extensive litigations forcing banks to take higher provisions even on NPLs where the recovery rate has been reasonably well established.

Yesterday’s announcement from RBI provides the following: (1) It has been assumed that any capital shortfall would be funded by the government of India in the past and hence, this move would have a positive impact for minority shareholders as the book value/share erosion would now be pushed forward by a year to FY20, (2) PCA framework appears to be achieving its key objectives of rehabilitating banks that are under severe stress. However, it remains to be seen what relief measures are being announced to these banks. (3) MSME lending has been an area of risk, especially for public banks and there is still uncertainty regarding the risk-reward framework even if temporary relief is provided.

Edited excerpts from Kotak Institutional Equities’ Banks (November 20) Co-authored by Nischint Chawathe, associate director for diversified financials and insurance, and Dipanjan Ghosh, financial analyst

The author is Associate director of banks, Kotak Institutional Equities

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