YES Bank under-reported FY16 bad loan, finds RBI audit

Though the Reserve Bank of India (RBI) has mandated banks to disclose the full extent of asset quality stress in their books, some private banks, it seems, continue to under-report their bad loan data.

On Friday, YES Bank’s stock price fell six per cent to ~1,483.85 on the BSE after a disclosure in its 2016-17 annual report, which said the RBI audit had pegged its total gross non-performing assets (NPAs) at five per cent for financial year 2015-16 (FY16), against the bank’s own assessment of only 0.76 per cent for the same year.

Analysts also say the under-reporting of numbers is not a phenomenon restricted to YES Bank. Foreign brokerage firm Credit Suisse said Axis Bank’s NPAs, according to the RBI audit, were higher at 4.5 per cent of loans versus 1.78 per cent reported by the bank in FY16, while ICICI Bank’s reported numbers at 5.85 per cent were lower than the RBI’s figure of seven per cent.

These two banks are yet to come up with their annual reports, but disclosed the numbers in a conference call with analysts after their March 2017 quarter results.

The RBI had asked banks to conduct an asset quality review in the third (Q3) and fourth quarter (Q4) of FY16, which resulted in a 70 per cent jump in their gross NPAs between September 2015 and March 2016.

On April 18, the RBI introduced a rule that mandated banks to disclose the RBI-assessed bad debt numbers, if the divergence between the central bank’s assessment and the bank’s actual reporting was more than 15 per cent.

In a statement, YES Bank said, “The disclosure on divergence in asset classification and provisions in NPAs in the annual audited financial statement is in conformity with the RBI circular issued on April 18, 2017.”

The divergence in the NPA data is for FY16. The bank statement also added that with the ongoing remedial actions undertaken by the bank in FY17, there have been several reductions, partial sale to asset reconstruction companies and improvement in account conduct, which significantly reduced the overall gross NPA divergence.

According to analysts, the RBI’s audit of bank numbers typically happens in Q3 or Q4 of the subsequent financial year, and therefore, FY16 numbers came up for scrutiny only in the second half of financial year 2016-17 (FY17).

In a report, stockbroking firm Macquarie said this raises questions about transparency. “While the bank managed to recover a substantial part and keep profitability intact in FY17, the issue is that investors will question the sanctity of the ~2,000 crore of gross non-performing loans (or 1.5 per cent of the loan book) reported for FY17,” Macquarie said, adding, however, that some of the loans were ‘current’ in YES Bank’s books, according to statutory auditors. But the RBI auditors judged these loans ought to be termed bad.

“The outstanding gross NPA as on March 31 includes one borrower with an exposure of ~911.5 crore, which is expected to be recovered in the near term. Specific provision held in this account was ~227.9 crore,” YES Bank said.

“Therefore, the bank reiterates that there is no carryforward impact of the divergence observed by the RBI in FY18 (financial year 2017-18),” the bank’s statement said.

The RBI had assessed that the bank had ~4,930 crore of bad loans, against the actual reported ~750 crore.