The Reserve Bank of India Bank is set to intensify its scrutiny of banks’ financial accounts during the annual financial inspection process as the banking regulator races to achieve the goal of cleaning up bank balance sheets by March 2017.
The RBI’s steps to tighten the screws on provisioning for bad loans could see industry wide profitability, especially at state-run banks, come under strain over the next six quarters as more and more stressed assets are unearthed.
Hitherto, there has been a discrepancy in the non-performing asset numbers that banks report and what the central bank finds during the annual inspections. It is often the case that a loan is kept as a standard asset despite there being incipient signs of stress. “Whenever such a case is found, banks are told to make appropriate provisioning,” said a banking industry source. Banks have to make a five per cent provision for standard assets while provisioning for a sub-standard asset is 15-20 per cent. Sub-standard asset is the first category of non-performing asset (NPA), that is when interest or principal is due for more than 90 days.
RBI Governor Raghuram Rajan has set March 2017 as the deadline to complete the clean up exercise. This is because, banks have to make a significant amount of provisioning, and instead of doing it at one go — which could severely impact their bottomline — they can spread it over six quarters.
“Given that banks have more powers we can now be a little more careful about recognition and the first step of that was to do away with forbearance starting April 1, but the next step is to make sure that what should be classified as A is classified as A and not B,” Dr. Rajan said on Tuesday, during the monetary policy review briefing. “So this is underway, and we hope that” by March 2017 the clean-up will have been done, the RBI Governor said.
The gross NPAs of public sector banks were 6 per cent at the end of June, up from 5.2 per cent in March. According to RBI data, industry wide stressed assets, that is gross NPA plus standard restructured advances, as a percentage of gross advances rose to 11.1 per cent as on March 2015 as compared with 9.2 per cent two years earlier. Public sector banks share a disproportionate burden of the stress.
The opaque nature of disclosure by public sector banks has also caught the attention of investors as most of these banks’ shares are trading at a discount to their book value. The subdued valuation has in turn limited their ability to raise capital from the market. While the government has promised capital infusion of Rs.70,000 crore over four years in public sector banks, that amount is seen as inadequate given the provisioning requirement and also the higher capital needed to comply with the Basel-III framework.
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