From FY2017 onwards banks will need to provide new disclosures where the shortfall in provisions as per RBI norms exceeds 15% of the reported net income and/or there is 15% difference between the reported gross NPAs and RBI-assessed gross NPAs.
The Reserve Bank of India came out with a couple of circulars yesterday aimed at stricter disclosure of NPAs. This came at a time when markets were about to breathe a sigh of relief that the peak of the NPA problem was behind them.
The banking regulator seems concerned about deviations from the prescribed norms in banks’ NPA recognition and provisioning. From FY18 onwards banks will need to provide new disclosures where the shortfall in provisions as per RBI norms exceeds 15 percent of the reported net income and/or there is 15 percent difference between the reported Gross NPAs and RBI-assessed Gross NPAs.
The RBI has asked boards of banks to assess risks in various sectors based on qualitative and quantitative parameters and proactively make provisions above minimum regulatory requirements. This should facilitate early recognition of the problem and perhaps even out provisioning rather than banks having to provide lumpy provisions once the asset turns bad.
In any case, as per Ind-AS which will be applicable from April 2018, banks will be required to do dynamic provisioning based on expected credit losses, instead of the current system based on days past-due.
In the immediate future, the RBI has asked banks to review telecom sector exposure by end-June 2017. Banks will have to review their exposure to the sector and provide higher standard asset provisions to buffer against future slippages. Banking sector debt to telecom stands at Rs 820 billion as of February 2017, i.e. 1.2 percent of total loans. The absolute exposure has reduced over the past one year, but this does not fully capture the risks from non-fund based exposures.
This is a welcome move from the regulatory perspective as recognition of the problem early is an important first step. However, in the absence of any robust resolution mechanism for the Rs 14 trillion toxic assets in the system, higher provisioning will further weaken the financial position of most corporate lenders.
The resolution of troubled assets has been tardy so far. So the regulator and the government needs to expedite it first.
In terms of banks, while it is difficult to assess the financial implication immediately as we are unaware of the new stressed sectors and at what rate the provision will have to be done, we do not see a slew of new sectors getting added to the stressed sector list.
Currently, most standard assets attract a provision of 40 basis points, residential real estate 75 basis points and commercial real estate 100 basis points.
With regard to exposure to telecom, our research suggests relatively higher exposure to the sector for a few banks like IDFC Bank, IndusInd Bank, Yes Bank, Canara Bank, Union Bank and Kotak Bank. We nevertheless, do not see anything beyond marginal increase in provisioning on account of the same.However, we do foresee a bigger problem for incumbent telecom operators as the higher provisioning requirements might dissuade banks from hiking exposure to the sector. This should strengthen the hand of the latest disruptor in the fray.