Bad Loan-Laden Banks Get a Brief Respite from RBI
Central bank prunes list of companies whose loans need to be provisioned for
Mumbai: RBI eased the pressure on banks by pruning the list of companies whose loans need to be provided for against the risk of default, said three people with knowledge of the matter. The immediate outcome of the latest decision will be better-than-anticipated results at banks in the quarter just ended, especially state-owned ones that have heavy exposure to highly indebted corporate houses.
In a late evening communication on Wednesday, RBI told banks individually that they don’t have to provide in the March quarter for outstanding loans to 20 firms, including Jaiprakash Associates and Coastal Energen, out of the 150 it had listed in December. The decision was prompted partly by the steps taken by companies to cut debt.
“On Wednesday, RBI issued a letter,” said a banker who did not want to be identified. “Some of the companies are removed from the list and no new names have been added as yet.”
The latest order from RBI comprises two parts — loans to companies that can be again converted to standard accounts, and others that have to be provided for in the March quarter, said the people cited above.
An asset quality review (AQR) ordered by the central bank last year had caused considerable heartburn among banks as RBI declared that lenders have to set aside funds against loans given to the 150 cos, including Essar Group and Bhushan Steel. Now that the list has become a little shorter, banks that loaned money to companies that have escaped the net could improve their bottom line.
Banks were forced to make substantial provisions in the December quarter following the AQR. Due to this, a number of banks reported record losses — that of Bank of India was .₹ 1,505 crore and IDBI Bank recorded .₹ 2,183 crore. For Bank of Baroda, which cleaned up its books in one shot, the loss was .₹ 3,342 crore and for Indian Overseas Bank, it was .₹ 1,425 crore. Provisions are expected to weigh down January-March results as well, but maybe not by so much after the RBI note.
In a recent report, Kotak Institutional Equities warned that the banking industry as a whole might see its profits collapsing because of the need to set aside this amount of cash. It had predicted state-run banks’ net profit to crash 87% and private lenders to post just a 5% increase in the March quarter. RBI Governor Raghuram Rajan in December rattled investors and bankers by ordering banks to provide for some of the assets that the lenders were still treating as standard loans. The central bank felt that these accounts were propped up by banks and were against its guidelines on bad-loan recognition. Analysts estimated this exercise would cost banks more than .₹ 70,000 crore.
“Our first focus was on assets that were very weak and needed to be classified as NPA (non-performing asset) under our rules,” Rajan told reporters earlier this month. Companies such as Jaiprakash Associates have reduced debt through asset sales. Some of the 150 companies were on the RBI list for technical reasons, such as the borrower not having pledged shares or the terms under which the loan was restructured not being fully compliant with rules.
The regulator removed a few of these companies from the list following representations from banks. “Some banks have done more than what we had indicated to them in the third quarter,” Rajan had said earlier this month. “Broadly, they were asked to spread this over two quarters. But remember that this time (the third and fourth quarters) has also given them the opportunity to rehabilitate certain assets. So let’s see what the final outcome is but the banks are fully following the spirit of the clean-up that was intended.”