RBI Deputy Governor SS Mundra says banks may be forced to provision more as recoveries are getting tough and more loans fall into the doubtful category.
Banks may have to set aside more money as buffer against bad loans (non-performing assets) as recoveries are becoming difficult and resolutions few and far between.
Indian banks are sitting on about Rs 11 lakh Cr of stressed loans where repayments are stuck or the loan covenants have to be eased to facilitate repayments.
According to the Reserve Bank of India (RBI) Deputy Governor SS Mundra, banks may be forced to provision more (money set as buffer for bad loans) as recoveries are getting tough and more loans fall into the doubtful category.
Loans on which interest and instalment of the principal remain overdue for a period of more than 90 days is called an NPA or a special mention account.
Another year of non-payment will migrate the loan to substandard category inviting a provision of 15% and then into the doubtful category with a provision of 25% of the total outstanding loan. So longer the banks take on recovery, higher the provisions or the money that they set aside as buffer for these loans.
"But some things are quite clear. One, we look at the past few years trends on recovery and upgradation via-a-vis incremental slippages it shows that rather than release of provision there may be requirement of additional provision. So unless and until recovery and upgradation overtakes additional accumulation provisioning requirements would be enhanced," Mundra said addressing the SBI economic conclave in Mumbai.
"I am sure that it would be a hazard to guess what sort of provisioning requirement is needed in the coming years as it is a dynamic situation. If you look at the total NPA stock of the banking system as on March 31, 2016, around 36% loans are in the sub-standard category, around 59% is in the doubtful category while 5% is categorised as loss. As the migration happens from sub-standard to doubtful, the provisioning requirement would go up," he said.
Another serious concern that Mundra highlighted was the leadership vacuum in the government-owned banks. There is a need for a longer tenure of five years for the bank chief executive officer (CEO) with definite milestones that need to be achieved, according to him.
"Unlike a car where we can talk about driverless car, I think we are far away when we can talk about a leaderless bank. I think that is not going to happen tomorrow. In public sector banks, if you look at the total 20 CEOs or CMDs, there is one vacant position. Eight of them are retiring in 2017, 10 of them are retiring in 2018, and there would be only one who would be retiring beyond the next two years."
A host of EDs either have already retired or are retiring in 2016, another 34 are retiring by 2019 and only three are remaining who will be retiring in 2020. Nearly 73% of the DGMs and GMs put together in PSBs are above 55 years of age. And, another 23% are in the age group of 50-55 years.
"So this is whole profile of leadership, the succession line and there I mentioned it can't be driverless car. So this is another area which needs a serious attention," Mundra said.
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