Fresh Stress

Banks face more pain as RBI seeks higher provisioning for even stan­dard as­sets in stressed sec­tors

Business Today - - CONTENTS - By ANAND ADHIKARI @anan­dad­hikari

The Re­serve Bank of In­dia, or RBI, has told banks to do higher provisioning than the reg­u­la­tory min­i­mum for even stan­dard as­sets, or good com­pa­nies, in stressed sec­tors. The higher provisioning for stan­dard as­sets, that is, com­pa­nies that are pay­ing in­ter­est and prin­ci­pal reg­u­larly, will cover sec­tors such as in­fra­struc­ture, power, me­tals, and tele­com.

The RBI has, in fact, named tele­com as one of the sec­tors for which banks should con­sider higher provisioning for stan­dard as­sets by June 2017. Banks have a `82,200 crore ex­po­sure to the sec­tor. At present, the provisioning for stan­dard as­sets in these sec­tors is 0.40-1 per cent, both in cor­po­rate and re­tail seg­ments.

The RBI has also told banks to have a board-ap­proved pol­icy for higher provisioning. It has sug­gested quar­terly re­view of stressed sec­tors based on pa­ram­e­ters such as debt- to- equity ra­tio, in­ter­est cov­er­age ra­tio, profit mar­gins, rat­ings up­grade- down­grade ra­tio, sec­tor NPAs, in­dus­try per­for­mance, le­gal/ reg­u­la­tory is­sues, etc. Tele­com has been sin­gled out for its in­ter­est cov­er­age ra­tio of less than one. The ra­tio, cal­cu­lated by di­vid­ing earn­ings by in­ter­est expenses, shows the com­pany’s abil­ity to pay in­ter­est. A fig­ure of less than one in­di­cates that earn­ings are not suf­fi­cient to cover the in­ter­est outgo. There has been dis­rup­tion in the tele­com space af­ter the en­try of Re­liance Jio triggered price war and con­sol­i­da­tion. CRISIL has said the price war will con­tinue this fi­nan­cial year also, hit­ting bot­tom lines. In fact, some banks have al­ready be­come cau­tious. Su­nil Kakar, CFO, IDFC Bank, says banks have done a rea­son­able level of provisioning. “The stressed as­set port­fo­lio has been pro­vided for much more than the reg­u­la­tory re­quire­ment. De­pend­ing upon our as­sess­ment of the tele­com port­fo­lio, we will make ap­pro­pri­ate provisioning.”

Given the lax credit stan­dards in public sec­tor banks, this proac­tive ap­proach is good. Higher provisioning will not only help banks ab­sorb losses in future but also bring prof­its by way of a write-back if the feared losses don’t hap­pen.

Banks gen­er­ally are in a fix when an as­set sud­denly be­comes sub-stan­dard. In the first year, they are re­quired to do provisioning of 15 per cent. This rises to 100 per cent of the loan in the next three years if the as­set be­comes doubt­ful.

The RBI move will hit banks’ prof­itabil­ity, though marginally. The bank­ing sec­tor has seen huge provisioning in the last six quar­ters af­ter the RBI ini­ti­ated quar­terly re­view by giv­ing each bank a list of ac­counts to be clas­si­fied as NPAs by March 2017. The 15 per cent provisioning (2.5 per cent each quar­ter till March 2017) led to huge provisioning. For ex­am­ple, SBI’s provisioning rose 43 per cent to `21,254 crore in the first nine months of 2016/17.

Ex­perts say the RBI will go af­ter stan­dard as­sets in other stressed sec­tors also, es­pe­cially metal, in­fra­struc­ture, tex­tiles, food pro­cess­ing, con­struc­tion, mines, etc. In these sec­tors, stressed as­sets com­prise 20-40 per cent sec­toral ad­vances.

The RBI move means banks will have to go through an­other year of short-term pain. ~

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