Fri, Feb 08, 2013 at 14:36
CDR rules to fortify banks, cut project-risk: India Ratings
Ananda Bhoumik of India Ratings says that the new debt restructuring norms announced by the RBI will strengthen the lending and risk-management processes in the banking sector. He adds, in an interview to CNBC-TV18, that the new rules will also reduce the risk in projects for industry.
Ananda Bhoumik of India Ratings says that the new debt restructuring norms announced by the RBI will strengthen the lending and risk-management processes in the banking sector. He adds, in an interview to CNBC-TV18, that the new rules will also reduce the risk in projects for industry.
Below is the edited transcript of the analysis on CNBC-TV18
Q: There will be a threefold impact of draft rules on restructuring- one from 2015 you will have to provide at the rate of 15 percent when someone does not pay, for the stock of restructured loans you have to start increasing the provisioning from the current 2.75 percent to 5 percent, and for every added restructuring you have to start providing at 5 percent. What will be the impact on the P&L for banks in FY14 and FY15?
A: According to our calculation of the possible impact of the probable implementation of the regulations over the previous five years on the performance of banks, the return on assets (ROA) would be affected by 15 - 20 bps. That is significant because the dip in ROA could be up to 20 percent depending upon the bank.
Bear in mind that once this is implemented, there would also be a lot more discipline in the creditor-borrower behaviour. Bankers would be more careful in structuring loans, estimating the payback period for long projects and overall, the loans would be structured more sensibly.
I think the concern that Reserve Bank of India (RBI) has had is that in the guise of restructuring probably some of the accounts which maybe should have been classified as NPL and should have been better provided, irrespective of the nature of restructuring, was not done and there was skepticism in the market that there was some amount of under-reporting of NPLs.
I think RBI has chosen to take that criticism head-on and has said that the way a bank treats its creditors is a different matter and is contractual in nature, but as far as depositors are concerned, they need to be adequately provided and protected.
Q: What are your thoughts on the stricter norms with regards to upgrades and recoveries? In the past few quarters, despite asset quality being negative the slippages have actually been protected because recoveries have been much stronger by a lot of PSU banks. How do you expect the norms to change up to 2015 and what according to you would be the impact on net slippages going forward?
A: There are two aspects to this. One of course is behaviour driven by regulation and the other is the way the cycle is turning. I think there are some early signs of confidence returning and increase in consumption.
If we argue that the credit cycle is going to bottom-out towards the middle of this year and then start easing, then I think we forecast slippages to start falling for that one important reason. The other reason is the regulatory deadline of 2015 and its impact on recoveries. It is quite likely that banks would ensure that the recoveries are done well before all restructuring is completed.
But I think the more important impact on slippages is going to come from the cycle. And I think that is crucial because with the GDP data released on Thursday, I think the early signs of a pick-up are being forecasted and I think that is probably going to have more impact on NPLs.
Q: Normally banks are allowed to upgrade a loan from 'NPL' to 'standard' or from 'restructuring' to 'standard' if there is good behaviour for one year. Now the new rules say that it should be one year of good behaviour after the longest moratorium is over. What we do not know is for a lot of companies, banks have given very generous moratoriums. With the period of upgrade spread over three-to-four years, will most of those loans be marked as NPL and therefore, will the levels of NPLs increase in April 2015?
A: I estimate these guidelines are meant to apply for cases of incremental restructuring and whatever the current stocks are, would be treated prospectively and not on an earlier-stock basis.
Q: Has India Ratings studied the impact on industry itself? Expectedly, credit will become a little scarce. With the very serious impact on net interest income (NII) growth, what will be the nature of the Q3 earnings? NPLs have improved and in several cases they have stabilised. But NII growth is quite bad. Either because there are people not taking loans due to the economic cycle or due to the psyche of a banker who has to provide for considerably. Do you expect industry to be starved and is that a factor in your analysis of non-bank companies?
A: Our understanding of the scenario is that this would actually help banks improve and fortify their risk-management which I think is good from a systemic perspective. But I do not think it will drive away business. What it would actually mean is that they should be in a better position to understand the risk and price it accordingly.
If a corporate feels because of that its risk premium has gone up and so therefore the project is less viable, then it would need to look at alternate measures including the bond market and credit enhancement if possible.
So that entire risk mechanism argument would then start playing out in a more transparent manner because banks are now going to be more conscious of two things - viability of the project and the tenure of the loan. I think these two are very crucial and banks are going to increase their focus more on these factors which is good.
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