Moneycontrol
Feb 14, 2018 08:57 AM IST | Source: Moneycontrol.com

NPA rules might weigh on earnings of banks in near term; negative for corporate banks

The revised stressed asset framework would lead to accelerated and early recognition of NPAs in the banking system and would require higher provisioning expense, suggest experts.

 
 
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The Reserve Bank of India (RBI) has tightened the screws to ensure early recognition of stress and then stressed asset resolution through a new NPA resolution framework. The new framework would require banks to resolve defaults within 180 days.

Further, starting February 23, banks must immediately identify the defaults and make disclosures every Friday to the RBI credit registry.

For accounts with an exposure of Rs 2,000 crore or more, banks will have to ensure that a resolution plan is in place within 180 days after a ‘default’. If not implemented within the timeframe, the account must be referred to the insolvency courts within 15 days.

All the earlier schemes like S4A, SDR, CDR, JLF, etc, stand withdrawn with immediate effect. Banks need to make appropriate disclosures in their financial statements, under ‘Notes on Accounts’, relating to resolution plans implemented The move is positive for the banking sector in the long run; however, in the short term, it is likely to impact earnings of banks which are already strained.

Also See:  RBI asks for weekly default disclosures in revised framework; withdraws SDR, S4A, and JLF

The revised stressed asset framework would lead to accelerated and early recognition of NPAs in the banking system and would require higher provisioning expense, suggest experts.

“Evergreening of loans may no longer be an option with the requirement of weekly reporting in case of accounts above Rs500 crore. Existing SDR loans where the scheme is not yet implemented will fall into the default category and would thus require higher provisioning,” ICICIDirect said in a note.

“Overall, this framework is negative from a banking sector earnings perspective in the near to medium term (as provisions surge). Rise in bond yields along with higher provisioning will keep earnings muted, especially for PSU banks,” the note added.

The recently allocated capital should largely be consumed for the cleansing of balance sheets and growth capital remaining a constraint. However, in the long-run, it is a goo1d structural change that can strengthen banking system in future.

ICICIDirect in the note added that within the private banks, corporate focused lenders would see the higher impact. “Further, the requirement of vetting of the resolution plan through credit rating agencies for independent credit evaluation (ICE) of residual debt is enhanced business for rating agencies and positive for listed credit rating companies,” it said.

Repeated divergences even after the AQR has probably prompted RBI to introduce theses tough guidelines so that banks do not evergreen and there is complete transparency in stress loan reporting, suggest experts.

We believe RBI wants banks to move towards IND-AS provisioning by March 2019, at least on incremental loans even if IND-AS is not officially implemented.

“RBI also wants an early resolution of stress rather than offering long dispensations which eventually lead to higher NPLs with a big lag. RBI has warned banks of penalties if these norms are violated,” IDFC Securities said in a note.

“The move is negative for all corporate banks. We prefer retail to corporate and within corporate we prefer private to state-owned. HDFC Bank and IIB remain our top picks. ICICI Bank is our key pick among corporate banks,” it said.
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