Jan 18, 2016 08:39 AM IST | Source: CNBC-TV18

Banks to need Rs 3.5 lk cr extra provisioning over 3-4 yr: Pros

According to Pawan Agrawal of CRISIL Ratings, the cumulative provisioning today stands at roughly Rs 1.5 lakh crore and as per their analysis, there is additional provisioning requirement of Rs 3.5-4.0 lakh crore which will have to be provided for over the next 3-4 years.

In an interview to CNBC-TV18 on Saturday, Pawan Agrawal of CRISIL Ratings, Ananda Bhoumik of India Ratings and CVR Rajendran, former Chairman and Managing Director ofAndhra Bank spoke about their outlook on the stress currently faced by the banking system.

According to Agrawal, the cumulative provisioning today stands at roughly Rs 1.5 lakh crore and as per their analysis, there is additional provisioning requirement of Rs 3.5-4.0 lakh crore which will have to be provided for over the next 3-4 years.  

Bhoumik also agrees on the broad amount of additional provisioning put out by Agrawal and adds that this would mean that most profits made by the stressed banks would go into providing for it unless government steps up budgeting towards providing relief.

“50-60 percent of PSU banks space vulnerable and based upon their likely net interest income performance in FY17, there is possibility of them using up bulk of their profits for additional provisioning,” Bhoumik says.

Rajendran said that while the 150 accounts identified by the Reserve Bank are mostly covered, the real worry is on the restructured accounts turning into NPA’s.

Below is the detailed transcript of the discussion with CNBC-TV18’s Latha Venkatesh

Q: What's your sense of the amount of stressed assets that banks have as of March 2016 and how much therefore they will have to provide?

Agarwal: Our estimate is that the right way to look at it instead of adding all GNPAs and stressed assets etc, the right way to look at it is, a weak assets figure which is where we add about 3-4 aspects. One is, the Gross NPAs is the starting point, then we add about 35 percent of the gross restructured book which is restructured standard accounts and the third thing that we do is that we add about 75 percent of the security receipts that the bank has sold or issued when they have sold their assets to ARCs and we have also started to add about 15 percent of the amounts the bank are structuring under 5/25. The element that we need to now start recognising is also the SDRs. Its a reasonably initial stage and I think success of the SDRs becomes critical. Apart from that the weak assets number will go up. 

That number in our estimate stands at about 7 percent of the overall banking system today and that cumulatively adds up to from a systemic perspective to about Rs 4.5-5 lakh crore, of which if you look at the provisioning, the cumulative provisioning today stands at about Rs 1.5 lakh crore. Therefore the remaining Rs 3.5 lakh crore kind of amount needs to be provided for over the next few years. I think that\\'s really the context in terms of the provisioning which we are looking at. 

Q: So immediately if you have to reach 25 percent of Provisioning by March 2017, what you are speaking of is an additional Rs 80,000 crore of provisions over second half and next year?

Agarwal: How you pace out the provisioning is something that will depend upon the ability of the banks to absorb that. If you look at overall because most of this is likely to be coming with public sector banks, our estimate is that their pre provisioning profits annually stand at about Rs 1 lakh crore every year. Therefore if they have to provide fully for the weak assets that we estimate of about Rs 4.5 lakh crore which means provide another Rs 3 lakh crore, it is likely to take about 2.5 to 3 years organically, unless there are aspects that are added in terms of capital upfront that comes from government or because we are expecting to see growth in the economy in India continuing to be reasonably better than the global economy and the push that we are seeing from the banking system to sell assets if the assets themselves get upgraded or the stress levels improve.

Q: What are your numbers? How much of un-provided stress is there and therefore in the next 6 quarters what may be the provisioning bill? 

Bhoumik: The provisioning of course is partly driven by what the regulations are. What we did in August was a bottoms up approach. So, we looked at company by company where the stresses are and we had certain filters based upon interest cover, debt to EBIT, market cap to debt and other measures and we identified 30 companies, 30 groups which were most stressed in our view and at various stages of recognition some of them were SMA1 or SMA 2, some of them were not in these category, were treated as standard and we tried to figure out because the arguments we were hearing at that point in time was that once the cycle turns these projects are viable and would bounce back and therefore doesn\\'t require adequate provisioning. 

What we did was, we tried to figure out what would happen to their topline in a peak economic scenario and then let\\'s assume in 2018 or whenever the economy bounces back., what would be their debt service capabilities and we realized unfortunately these companies have had a bit too much debt for even their peak servicing ability. We also realized that they would probably need to shave off their debt by anywhere between 20-30 percent.

Most of these companies were in the sectors that were already been identified - iron and steel, infrastructure obliviously the leading ones and few in textiles. Now that number, the extent of under provisioning that the banking system apparently doesn\\'t recognize at this point but could be required over the next several years came to about Rs 1 lakh crore. If the RBI now fast tracks that process and I think that\\'s a right approach because once the banks make a provision they are in a better position to dispose these assets or negotiate better or seek revival of these assets, I think then an amount of about Rs 1 lakh crore would need to be provided by the banking system over the next six quarters.

Q: This will mean that at least the bottom 16 banks that the RBI said have over 16 percent in terms of stress. So probably 14 of them are at least public sector banks you would see these reporting losses if not given capital?

Bhoumik: We would think that most of the profits that the banks would generate over the next year or so and keep in mind we are still in low interest rate regime, so therefore NIIs are under pressure, we would think that most of the profits that these banks generate would be required to make these provisions wherever there is a dip in capital. So growth capital would need to be supported by the government. 

Therefore if the assumption earlier, the Rs 70 thousand crore that the government had budgeted, the assumption there was of course improving profitability since we are actually looking at reversal. Our sense is that requirement, that budgeting by the government would need to be stepped up significantly, probably doubled.

Q: What is your estimate, you see it from closer quarters? These gentlemen are speaking about Rs 3-3.5 lakh crore of further stress that has to be recognized. What is your estimate?

Rajendran: Could be a possibility, Rs 3-3.5 lakh crore could be a possibility. Banking system has the ability to provide for it. As Crisil report says, maybe in another two years the entire amount can be absorbed. Already 60 percent provision coverage is there in some banks, at least on an average about 50 percent provision coverage is there. The problem seems to be on three accounts, as far as 150 accounts are concerned and I talk to many banks, most of the banks say they already recognized this as an NPA and provisions are already made, there is nothing new. This kind of divergence was found out by the AFI reports all through the years and this was done in the first quarter itself for all the banks together, a coordinated approach. So, there is nothing new, these 150 accounts may not create tremendous pressure and those banks which have not provided for it will be in position to absorb it in the next two quarters, that is the December quarter and March quarter it will be completely provided for.

The concern seems to be about the restructured accounts. The Macquarie report says that 41 percent of the restructured accounts which are coming for their repayment now after completing their moratorium are failing. I don\\'t have the number, I don\\'t know whether the number is right. Presuming that it is right which means about 20 percent of the restructured accounts ought to be provided for. That is a mind boggling number for us.

If that number is true probably the provision coverage should start right from now. I think RBI has already sounded the people, start providing for the restructured accounts more than the 5 percent which we already have. Already 5 percent provision is made as per the RBI rules. In the next six quarters .probably if they start providing another 2.5-3 percent then they will build for 15-18% provision because most of the accounts are restructured during the last two years. So, when moratorium is completed 15 percent provision will be there even if the account fails.

Q: Tells us that about Rs 3 lakh crore is the unrecognised stress. Mr Rajendran you said that you broadly agree with the CRISIL numbers and separately we have this 150 accounts which Reserve Bank has recognised. Let us talk pure numbers, this year for the second half for which numbers are not reported how much more provisioning you think will be needed to provide for these 150 accounts. 

Rajendran: 150 accounts I don’t know what is the volume? Market is talking about somewhere between Rs 1 lakh and Rs 1.5 lakh crore. Some other banks are already provided for it so not every banks needs to provide for it. Presuming that Rs 50,000 crore is already provided Rs 1 lakh crore is to be provided 15 percent provision requires Rs 15,000 crore. If it spread over a period of two quarters Rs 7,500 crore per quarter is not a very alarming number for me.

As far as restructured accounts are concerned Macquarie Report says 41 percent of the restructured accounts which are coming for repayment today after completion of the moratorium is not able to meet the payments and becoming NPAs at that point of time. Presuming about Rs 6 lakh crore is an NPA, I don’t have the exact number, it is a roughly above that number Rs 6 lakh crore about which Rs 3 lakh crore has already completed the moratorium period coming out for the repayment today. Out of which a 41 percent is failing. If it is failing about Rs 1,20,000 crore is failing it requires about 15 percent provision as of now. 

Given if you talk about 25 percent provision which RBI is talking about 5 percent provision has already made for this restructured accounts and Rs 20,000 provision is to be added to it. Rs 1,20,000 crore 20 percent means about, say about Rs 24,000 crore is etc amount which we may have to provide.

Q: Rs 24,000 crore in the next one year?

Rajendran: Next one year period, right. 

Q: Do you believe that just this 11.8 percent that is gross non-performing assets (GNPA) plus restructured, I think 11.3 which is recognised is all the stress. There is stress outside that so what is your guess off the total assets known so far? I mean several more may become bad but as of now should be go with 11.8 is that a fair number or should we think it is 13, 14 or 15?

Rajendran: 11.8 may not be a fair number from my opinion because there are some assets which are having the stress in built because of this record of recovery or because of some ever growing efforts or for sanction of new facilities might have been concealed in some banks but this will come out. Now RBI is very clear about it. RBI doesn’t permit unless that cashflow is from the operations RBI is not willing to accept it as a repayment at all. So, these accounts will be shown as NPA that is — (NOT SURE) and 150 accounts. So, some more NPAs may be declared in some banks not in all banks. 

Outside that what is a restructured accounts which are failing that number is little higher when Macquarie Report say so 41 percent is failing when it is coming for – that is a very large number. 

Q: What is your number?

Rajendran: My experience has been every quarter I was seeing about 5 percentage getting into the NPA in the past. So, about 20 percent of the restructured accounts were getting into the NPA portfolio from restructured to NPA in the past. May be it may go up slightly more 25 percent – 30 percent.

Q: How many banks do you think may report losses? The pace at which provisioning is demanded from the regulator. 

Bhoumik: If you look at the vulnerability obviously is there with the PSU banks unfortunately. Our sense is that banks with a pre- provision operating profit percentage of less than 0.5 percent in essence where the return on assets (ROAs) are at 0.3 or 0.4 are obviously the ones most vulnerable which I think would mean about a 50-60 percent of the PSU banking space at this point. Based upon their likely net interest income (NII) performance in FY17 is possibly under pressure of using up bulk of their profits for the additional provisioning. 

Q: The India ratings number that the bottom half of the banks could be vulnerable is that a fair picture? That will mean almost about 10 public sector banks?

Agrawal: If I look at our ratings, our ratings in public sector banks about 9 or 10 of them have negative outlook. That is something that will give you a good picture of the likely movement in the credit profile over the next 12-18 months and that really is about half of the public sector banks today.

Q: Would you agree with that number, those are the banks where we may see losses and where the government will have to take some serious steps in terms of either recapitalising or consolidation or some such steps?

Rajendran: If the loss reported is for a single quarter or two quarters we need not think much into it, if it is continuous then we have to worry about it. There are banks which have reported losses - Central Bank has reported loss, Bank of India has reported loss, it is a cleaning up process. As a one-time measure when these 150 accounts have to be accommodated some banks are going to incur loss, that is okay but they will be in a position to come back.

The liability side also lot of responsibility is coming from the banks now. All the bulk deposits are paid back, CASA ratios are increasing, the cost of deposit is coming down, their NIM could expand in the future. So, the ability to absorb losses may go up with the banks also.

Q: The RBI and the government have been telling the banks that there won\\'t be any political pressure. Do you think that, you already have a Sahara and a Vijay Mallya who have been declared as defaulters and various degrees of penalties have been imposed on them. Do you see one or two more business groups genuinely being taken on and made to pay?

Rajendran: That is happening today. I have not seen or heard in the market that government has pressurised any bank.

Q: But nobody has gone to jail and nobody has lost control of their assets. We know some of the big defaulters groups like Essar, do you think that the banks will go after them?

Rajendran: Nobody has come in the way of bank taking action as on date. To what extent banks will be in a position to put together and act together is a different thing. There are lot of legal hurdles which are coming in but even the legal process the finance ministry is talking about simplifying now and the DRT Courts being fastened up. There are no arguments at all, only written arguments he is talking about. The process will be hastened and probably we will be in a position to realise at the earliest.

Q: Outside the realm of rating, do you think that it will be necessary for the government to move against one more group or at least allow the banks to change the ownership of one of the most delinquent groups, will that be an example which will automatically bring back money from some of the indebted promoters?

Agarwal: I think that process has already begun, if you look at the SDRs, SDR is a institutional response to a requirement like this.

Q: These are all small pickings, we have not seen big guns like Essar who have defaulted twice on their steel payments, twice restructured steel accounts, FRNs they defaulted to their foreign lenders, their OFCDs they defaulted to their domestic in Essar Oil, do you see the government taking on some big groups like that?

Agarwal: I think the response has to be more institutional which is as I said the process has begun. My understanding is that the SDR process is gaining momentum. The success of SDR actually will move ahead some of this process. Also the banks today are far more focused upon asset sales and we have seen lot of asset sales happening from some of the very large indebted groups as well. So, therefore the process has begun. It will take time given the legal complexities and the structure that we have in India but we are on the right path.

Latha Venkatesh: So key takeaways:
1: The markets estimate as you heard from the rating agencies is that the total amount of bad assets is probably around Rs 5 lakh crore that has not been provided.

2: Bankers tell us that the whisper number doing the rounds for the current year is that at least Rs 1.5 lakh crore needs to be provided for. 

3: However the RBI officials tells us that for the next year it is impossible to find out how much will need provisioning because its dynamic situation. Will depend on steel prices and the India growth story itself.

4: Important key takeaway, RBI officials told us that government and RBI are on the same page when it comes to cleaning up bank and balance sheets.

5: Government has assured banks that they are ready to provide whatever capital that is needed after the clean up process is over.

6: Also RBI officials say they are ready to provide any liquidity support if needed in the process of high provisioning should the banks need as well RBI stands ready to provide any regulatory relief that they believe is available, that is provided banks need that kind of capital support. However the message is that all parties want banks balance sheets to be cleared 

7: It would be very good if banks, government and RBI show the same commitment to go after at least one or two delinquent promoters and actually divest, seize their assets and bring in new promoters that will perhaps make other defaulting promoters fall in line.

All told it appears that the entire exercise will make banks safer and cleaner in terms of their balance sheets, more reliable entities as well India perhaps will be seen as a place where crooks and defaulters are punished. Looks like the exercise is all for the best.

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