Two measures announced by the Reserve Bank of India (RBI) last week will provide much-needed breather to banks by reducing their provisioning burden for the fourth quarter of fiscal 2018 by ~Rs 27,000 crore.
These include allowing an extra quarter (till June 2018) to reach 50% provisioning (40% by March 2018) on accounts referred to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC) framework, and permitting spread-out of marked-to- market (MTM) losses on investments incurred in the third and fourth quarters of fiscal 2018 across four quarters.
“Accounting for the MTM losses over four quarters would mean ~Rs 8,000 crore provisioning relief including write-backs for banks in the last quarter of fiscal 2018,” said Rama Patel, Director, CRISIL Ratings. “Another relief worth ~Rs 19,000 crore, in the form of lower provisioning or write-back, would also ensue because the RBI has permitted banks to achieve 50% provisioning on accounts referred to NCLT by June 2018 instead of March as stipulated earlier.”
Profitability of banks has come under intense pressure as provisioning requirements have been rising with ageing of non-performing assets (NPAs), withdrawal of various restructuring schemes prior to February 2018 causing an increase in NPAs, and a sharp rise in bond yields since September 2017 leading to significant MTM losses in their gilt investments.
Yields on the 10-year benchmark G-sec had surged 74 basis points in the second half of fiscal 2018.
“In fiscal 2019, operating profitability of banks should stabilise on the back of incremental credit growth and lower interest reversals after reduction in fresh slippages to NPAs but overall, bottomlines will remain under pressure because of high provisioning burden stemming from the large stock of NPAs,” said Vydianathan Ramaswamy, Associate Director, CRISIL Ratings.
However, the silver lining in fiscal 2019 is expected to be recoveries from the resolution of few large accounts under the IBC, especially from the steel sector, which recently saw multiple bids from investors. That should provide some offset to the high provisioning requirements.
Further respite to bank balance sheets would depend on the extent and timing of recovery from other stressed assets.