Loan recast double blow for banks

The Reserve Bank of India’s (RBI) proposed guidelines requiring banks to set aside more money to cover potential bad debts from restructured loans could result in a Rs15,000 crore extra burden on the lenders between the next two fiscals.

That could lower their profit by 7% for the period, said Crisil Ratings in an analysis.
That’s because, starting next fiscal, restructured loans will no longer be classified as standard asset, will slip into the non-performing loan (NPL) category and require more provisioning, according to the draft guidelines based on Mahapatra Committee recommendations.

Only the infrastructure sector has been given an exemption.
The impact will be more on public sector banks as they account for nearly 85% of total restructuring, Crisil said.

The draft report asks banks to provide 5% for new restructured loans from April 1, 2013, and 3.75% for old restructured accounts from the current 2%  norm. This, too, will be raised to 5% for older accounts starting fiscal 2015.

According to rating agency Icra, while the gross NPA percentage of the banking system is likely to shoot up with the implementation of the new guidelines, corresponding restructured advances, which have also been a source of vulnerability so far, are likely to come down, thereby limiting the incremental impact of the new asset classification on the credit profiles of banks.

The new guidelines are meant to discourage banks from accepting undeserving cases for restructuring just to avoid higher provisioning cost.

The change will nearly shut the door for companies seeking a loan recast.
“Restructuring is going to be much harder than earlier and banks will no longer accept liberal terms for these restructuring cases. Tougher terms will be demanded and only genuine cases will be accepted,” said a senior official in charge of restructuring loans for a large public sector bank, who did not want to be named.

The new norms are expected to bring transparency in the asset quality of banks and discipline in recognising bad assets.

“The guidelines are structurally very positive for banks. Some restructuring was taking place just to hide bad loans,” said an analyst with a Mumbai-based brokerage. “The kind of restructuring that we have seen for the last 3-4 years will not take place and the quantum of restructuring will come down.”