CRISIL Ratings, India's largest credit rating agency, believes that Reserve Bank of India's (RBI's) draft guidelines, if implemented in the current form, would increase the banking sector's provisioning requirement by Rs.150 billion between April 2013 and March 2015.
RBI restructuring norms will strengthen confidence in asset quality, says CRISIL
CRISIL Ratings, India's largest credit rating agency, believes that Reserve Bank of India's (RBI's) draft guidelines, if implemented in the current form, would increase the banking sector's provisioning requirement by Rs.150 billion between April 2013 and March 2015. This is expected to lower banks' profits by around 7 per cent for this period. Nevertheless, there are two key qualitative positives that emerge from these guidelines. First is the withdrawal of regulatory forbearance for restructured loans from April 2015. Second is the tightening of the process of restructuring. These stipulations will enhance the confidence of stakeholders in banks' asset quality and discourage large-scale restructuring activity.
CRISIL had earlier highlighted the risk of increase in loan restructuring for Indian banks (refer to CRISIL release ‘Loan restructuring to reach Rs.3.25 trillion by March 2013' dated August 30, 2012). The cumulative loan restructuring from April 2011 touched Rs.2.25 trillion by December 2012. CRISIL believes that loan restructuring activity will continue over the near term, albeit at a slower pace.
In the context of such a significant quantum of restructuring, the revised guidelines will result in a Rs.150-billion increase in the provisioning costs for banks over the next two years. This quantum factors in the combined impact of higher provisioning (of 5 per cent by March 2015) on existing stock of restructured loans, and expected incremental restructuring. The impact on public sector banks will be greater, as they account for around 85 per cent of the total loan restructuring.
Says Mr. Pawan Agrawal, Senior Director, CRISIL Ratings, "The guidelines will strengthen the NPA recognition norms of banks by withdrawing regulatory forbearance for restructured loans, and proposing tighter norms for upgradation of NPAs from restructured accounts." This alignment with international best practices will improve confidence in banking sector's asset quality. This, in turn, will encourage banks to enhance their credit underwriting and monitoring practices, particularly for large corporates.
Adds Mr. Agrawal, "The guidelines also seek to dissuade large-scale restructuring by Indian banks by making it costlier for banks, tightening viability assessment criteria for loan restructuring, and stipulating higher promoter commitment."
The revised guidelines also provide an adequate transition period for banks to adapt to the new regulations. Mr. Suman Chowdhury, Director, CRISIL Ratings, says, "The continuation of asset classification benefits to banks for their restructured under-construction infrastructure project loans beyond March 2015 provides them with some breathing space." This recognises the challenges inherent in estimating timelines for necessary clearances during the projects' implementation phase.
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