RBI's call for higher provisions on telco loans may not have big impact on banks: Elara Cap
The central bank recently released guidelines on standard asset provisioning and also on disclosure of non-performing asset (NPA) details. As a pre-emptive step, the banks will have to set aside higher amount for stressed assets.
The Reserve Bank of India (RBI) has asked banks to make higher provisions for exposure to the stressed telecom sector. However, this RBI notification will not have 'significant impact' on profitability of banks as the exposure to telecom sector has contracted over the past year, according to an Elara Capital report.
Currently, banks’ exposure to telecom companies is 3.2 percent as against 3.4 percent a year ago.
"Ideally, loan exposure attracts standard asset provisions of 0.4 percent, assuming banks increase standard asset provisioning at the rate of 1.0 percent, the impact on ROA (before tax) would be at 2 bps. In a worst case scenario, if 25 percent of the telecom exposure turns bad, the impact on ROA (before tax) would be at 15 bps," says the report.
The central bank recently released guidelines on standard asset provisioning, and disclosure of non-performing asset (NPA). As a pre-emptive measure, banks will have to set aside higher amount for stressed assets.
While the central bank has asked for higher provisioning, no specific standard has been set for it, the report notes.
On the need for detailed disclosures, the report says: "Banks with higher net NPA, lower provision coverage, lower core equity capital and lower profitability would face a difficult time."
While the RBI has put out guidelines for telecom, lack of clarity on other sectors is worrisome.
The central bank’s Financial Stability Report shows that state banks has total gross NPA of 16 percent in industries, 6.5 percent in services, 6 percent in agriculture and 2.3 percent in the retail sector.
Here, if the banks would have to take significant hit on bottom line.“For these sectors, the remaining portion of standard restructured loans would already have provisions at a rate of 5 percent on outstanding stock, but for the rest, it is unclear whether the banks would make higher provisions,” says the report.