NPAs, provisioning set to increase, say analysts

RBI’s revised framework on how banks must recognise stress and provide for bad loans, is expected to hurt lenders. Analysts say it would increase reported NPAs of banks in coming quarters and increase their provisioning.

These concerns are expected to reflect on Dalal Street on Wednesday when the market opens after Tuesday’s holiday.

The new framework defines timelines for recognising bad loans and subsumes all past schemes in the overall framework and at the same time, provides banks flexibility to work out a realistic resolution plan.

Analysts said early identification of stress and resolution would prevent ever-greening of loans by banks.

Manish Aggarwal, partner and head (resolutions, special situations group), KPMG India, said, “The Insolvency and Bankruptcy Code (IBC) framework is more favoured by investors, as it provides a transparent way to acquire assets. So any situation if not resolved within a defined timeframe, will be referred to IBC. A little more accommodative stance around provisions framework for the restructured assets to allow banks an incentive to make this work would be welcomed.”

“We would also have to assess its impact on bank balance sheets, and the credit pick up. This also provides a window to borrowers to work towards a ‘win-win’ resolution plan by working with the lenders,” he added.

The revised guidelines for expeditious resolution of bad loans, harmonises the existing guidelines with the norms specified in IBC. The notification said all accounts, including those where any of the schemes have been invoked but not yet implemented, will be governed by the revised framework.

The guidelines entail proactive resolution of the stressed assets whereby lenders need to finalise the resolution plans as the accounts slips into the special mention accounts (SMA) category.

But unlike the earlier joint lender forum framework, which formulated resolution plans for SMA accounts, the revised guidelines also require the resolution plan to have independent credit evaluation (ICE) from credit rating agencies (CRAs) subject to a minimum credit opinion of “RP4” on scale of “RP1” to “RP7”.

In the absence of minimum requisite level of credit opinion, the resolution plan will not deemed to be implemented and banks will need to initiate bankruptcy proceedings against these borrowers under IBC, 2016.

To start with, the resolution plans of large borrowers with Rs 100 crore and above of exposure from banks would need ICE from CRAs. Also to prioritise the resolution in large stressed accounts, the timeline for large borrowers with exposure of Rs 2,000 crore and above needs to have a resolution plan with ICE approved by CRA before September 1, 2018, in the absence of which banks will need to initiate bankruptcy proceedings against these borrowers under IBC.

For accounts of more than Rs 100 crore but less than Rs 2,000 crore, RBI will announce the timelines separately.

The gross NPAs and standard restructured advances of banks are estimated at 12.6 per cent as on September 30, 2017.

Additionally, as per RBI’s financial stability report, SMA2 advances are estimated to be around 3.5 per cent of the gross advances. “Hence the overall stress levels of banks including SMA0 and SMA1 borrowers is much higher than the reported GNPA level of 10.3 per cent as on September 30, 2017,” said Karthik Srinivasan, group head, financial sector tatings, Icra.

Also lowering the threshold for resolution to Rs 2,000 crore per borrower will enlarge the overall quantum of debt being resolved on fast track basis.