The Supreme Court’s interim stay on banks from classifying borrowal accounts that are standard as on August 31 as non-performing assets (NPAs) till a final order could mean a major bad loan shocker for the industry in the third and fourth quarters, analysts and banking sector experts said. This will have implications since banks need to set aside money for bad loans under the Reserve Bank of India (RBI) norms.
The Supreme Court’s September 3 interim order has already been used by one of the banks—Karnataka Bank—which announced its second-quarter results early this week. The lender has shown a declining NPA trend presumably because it has not tagged any accounts NPA that are standard on its books as on August 31. Other banks are also likely to do this, showing lower NPA numbers in the second quarter.
The next hearing of the Supreme Court is on November 2. This means, at least till that date, the interim directive of the SC will continue.
"NPAs are likely to go up given the economic situation and job losses,” said RK Bansal, Managing Director and CEO of Edelweiss Asset Reconstruction Company. “There are two main variables here. The SC order and the one-time loan recast (OTR). Those accounts which are not eligible for OTR and are not able to pay after moratorium will reflect as bad loans on the books of banks in Q3 and Q4. In Q2, banks cannot disclose these accounts as NPAs till the SC passes final orders” said Bansal.
Gross NPAs of Indian banks stood at around 8.2 percent in March 2020. This is expected to shoot up to 11.5 percent by next year March, according to some recent estimates by rating agencies.
The SC intervention is not the only thing that is hiding the actual stress in the banking system. The six-month moratorium announced by the RBI beginning March has meant a lot of stressed accounts that would have turned NPAs are remaining standard. The one-time restructuring scheme that will be implemented subsequently will further give an option for stressed accounts to avail moratorium for up to another two years.
The SC order letting banks stay on hold on declaring new NPAs will give a breathing space for stressed borrowers to plan and apply for one-time loan recast.
So what will happen on NPA asset classification now?
There are now three categories of loans before bankers now to deal with. First, loans in the SMA-0 category as on March 1
(meaning no overdues on that date) that are eligible for moratorium and one-time restructuring (OTR) and will likely go for restructuring. Second, SMA1 and 2 categories (overdues between 30 days and 90 days) which are not eligible for restructuring or moratorium. The third are standard loans which have not opted for moratorium and will not opt for restructuring. Loan accounts which opt for OTR and are eligible will not get the NPA tag till December 31—the time given by the RBI to implement restructuring.
“We are already in the third quarter now. Hence, Q3 will also be impacted by the SC order. It will be in Q4 that banks will have to show all NPAs and make provisions accordingly. That will be a shocker,” said Naresh Malhotra, an independent banking consultant.
The six-month moratorium period is over. But, as mentioned above, the SC order makes it impossible for banks to declare fresh NPAs if the account was standard as on August 31 (when the moratorium ended). Hence, the classification continues as standard till a final order from the apex court.
After that, the account can still remain standard if it manages to get the one-time restructuring benefit. Under this, banks can relax the repayment terms and extend the moratorium for up to two years.
Uncertainty on asset quality situation
Analysts said the SC order will effectively make NPA calculations complicated for Q2 and Q3. “You don’t know what is the actual stress out there,” said Anand Dama, an analyst at Emkay Global. “Karnataka Bank has already used the SC stay. Other banks could also do this till the final order. This means all NPAs will be pushed up to Q3-Q4,” said Dama.
The reported gross NPAs of Karnataka Bank fell to 3.97 percent of the gross advances as on September 30, 2020, from 4.78 percent in the year-ago period. In absolute terms, the gross NPAs were down to Rs 2,188.80 crore from Rs 2,594.27 crore. Net NPAs or bad loans fell to 2.21 per cent (Rs 1,194.60 crore) from 3.48 percent (Rs 1,863.11 crore). But the bank said it has not disclosed any borrowal account which has not been declared as NPA as on August 31 following the recent SC order.
How do hidden NPAs impact banks?
Bad loans are loans where repayment is overdue over 90 days. Banks have will have to make provisions (set aside money) to cover likely losses from such loans. The provisions can start from 10 percent and can go up to 100 percent depending upon the stage of default and value of underlying collateral.
If the accumulated NPAs remain hidden for a few quarters that is a crisis in the making for banks. For now, the lenders can show a declining NPA trend. But that’s not the true picture. Once the time comes to declare all NPAs, banks will have to face a big jolt unless they make enough provisions in the previous quarters to cover that bad loan spike.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
