RBI wants banks to make more provisions even for good loans

The Reserve Bank of India (RBI) on Tuesday advised banks to consider setting aside higher provisions even for good loans in stressed sectors. The advisory means the central bank is worried that banks have not fully recognised their bad loans, said experts.

Indian banks are sitting on a toxic loan pile of at least ₹7 lakh crore, or 9% of all bank credit.

The RBI specifically redflagged the telecom industry, and asked bank boards to review their exposure to the sector by June 30 and consider making provisions at higher rates “so that necessary resilience is built in the balance sheets should the stress reflect on the quality of exposure to the sector at a future date.” This means banks should consider making higher provisions immediately for the telecom sector.

Under current rules, most standard assets attract a provision of 0.4%. The few exceptions include credit to commercial real estate – which has a 1% provision, and residential real estate (0.75%). However, RBI hasn’t specified the extent of higher provisioning for good loans to telecom or other stressed sectors.

“We are not surprised that banks will see higher provisioning going forward. We have already accounted for a potential jump in fresh slippages of 2.6% of total bank loans in the next 12 months,” said Udit Kariwala, analyst,financial institutions at India Ratings & Research. In a February 15 report, the agency had said that impaired assets would peak at 12.5-13% by 2018-19.

The central bank has also asked banks to put in place a board-approved policy for making higher provisions depending on the stress in various sectors. This policy should be reviewed every quarter depending on the performance of the sectors to which the bank has an exposure, the central bank said.

Currently, bank lending to the telecom sector stands at around ₹82,200 crore. The industry has been going through a tumultuous period with the launch of services by Reliance Jio Infocomm Ltd. A February 17 India Ratings and Research Report had predicted that the industry has lost about 20% of revenues post the launch of free services by Jio. The industry’s debt levels have risen sharply from ₹2.7 lakh crore in 2014 to ₹4.85 lakh crore at the end of December 31, 2016.

“The new regulation will increase credit cost for banks,” said Karthik Srinivasan, senior vice-president, Icra Ltd.

In a separate notification, the regulator also increased disclosure norms for banks after it noted instances of divergences in banks’ asset classification and the provisioning required as per RBI norms. “This has led to the published financial statements not depicting a true and fair view of the financial position of the bank,” the regulator said.