New draft guidelines to raise provisioning of banks: CARE

CARE Research has come out with its report on "Draft guidelines to raise provisioning; despite up-gradation PSU banks remain stressed". According to the research firm, the increased promoters’ contribution and personal guarantee may temper the pace of restructuring, as only the genuine cases will be referred for restructuring during F13e-FY15e.

The recent draft guidelines and notifications with respect to provisioning and up-gradation norms for standard restructured advances by RBI is in-line with the recommendations of the working committee on prudential guidelines on restructuring of advances by banks/financial institutions. CARE Research views the recent draft guidelines on restructuring and the notification on disclosure requirement being regulatory positive developments towards aligning with global prudential norms. We revise our estimates of total restructuring to ~Rs. 2,80,000 - 3,10,000 crores by FY13e (v/s. Rs. 3,80,000 - 4,00,000 crores) on the assumption of 1) at least ~25% of O/S restructured assets in FY12 would be upgraded instantly, and 2) ~60% of O/S standard restructured assets in FY12 will be fresh restructuring in FY13e. If the draft guidelines get accepted, CARE Research estimates that banks provisioning to increase in the range of ~Rs.5,000-7,000 crores during FY13e - FY15e on the conservative assumption of 1) 20%/12% of O/S restructured advances in FY13e getting fresh restructured/upgraded in FY14e and 3%/7.5% of O/S restructured advances in FY14e being fresh restructured/upgraded in FY15e, and 2) improving economic activity and market sentiment in FY14e/FY15e.

Provisioning on standard restructured assets to go up by 225bps
The RBI, in its monetary policy announced in Oct 2012, proposed increase in provisioning requirement on restructured standard assets by 75bps (leading to total provision of 2.75%) in an attempt to ensure robust financial mechanism and adopt best global financial practices. In continuation to that, and taking cue from recommendations of the working committee constituted by RBI & chaired by Mr. B. Mahapatra, RBI issued the draft guidelines on provisioning of restructured standard advances on 31st Jan 2013. The RBI’s draft guidelines directs banks to maintain provision of 5% on new restructured standard assets from April 1, 2013 and step-up the provisions in a phased manner up to 5% on stock of restructured standard assets till March 31, 2015. Also, RBI in its draft guidelines included the following:

• All the accounts getting restructured post FY15 to be directly classified as sub-standard. Attempt to do away with restructuring totally (excluding infrastructure)
• Redefined "specified period" for up gradation, as one year from the commencement of the first payment of interest or principal, whichever is later, considered from the credit facility with longest period of moratorium
• Time period for attaining viability reduced to 8 years from 10 years for units engaged in infrastructure activities and 5 years from 7 years for units engaged in other activities
• Short-term loans account to be treated as restructured loan if it is rollover for > 2 times
• On restructuring of large exposures under CDR mechanism, promoter’s sacrifice and additional funds brought by them should be a minimum of 15% of bank sacrifices or 2% of debt restructured, whichever is higher
• As a last resort, conversion of debt into equity capped at 10% of restructured debt and only if shares are listed
• Revised disclosure requirements to reduce the expected restructuring levels

The RBI, in its notification dated 31st Jan 2013, issued the disclosure requirements on restructured assets by banks/financial institutions. CARE Research believes that the disclosure requirement guidelines would re-categorize and upgrade some standard restructured assets as standard assets due to their satisfactory performance during the respective monitoring period. Hence, we revise our estimates of total restructuring to ~Rs. 2,80,000 - 3,10,000 crores by FY13e (v/s. Rs. 3,80,000 - 4,00,000 crores) on the assumption of 1) at least ~25% of O/S restructured assets in FY12 would be upgraded in FY13e, and 2) ~60% of O/S standard restructured assets in FY12 will be fresh restructuring in FY13e.

To conclude, the RBI’s notification with respect to restructured assets disclosure could enable greater accounting and reporting transparency governing asset quality of banks/financial institution. Also, as per the draft guidelines, the increased promoters’ contribution and personal guarantee may temper the pace of restructuring, as only the genuine cases will be referred for restructuring during F13e-FY15e. CARE Research is of the opinion that mere regulatory changes are not enough to address the current challenging scenario facing banks and suggests that PSU banks take sustainable measures at the operational front to lower the elevated levels of expected restructuring.

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