COIMBATORE: Indian banks need to provide a bare minimum of Rs 18,000 crore additionally towards the 12 accounts identified by the Reserve Bank of India (RBI) for reference to the National Company Law Tribunal under the Insolvency and Bankruptcy Code in 2017-18, India Ratings and Research has estimated.
The agency’s analysis pegs the weighted average provisioning currently at 42% by banks towards the 12 identified accounts. The additional provisioning would eat into banks’ profits by around 25% in 2017-18, it said. “This indicates a shave-off in return on assets of 12 bps (0.12%) in 2017-18,” it said.
India Ratings said that the additional provision burden could add disproportionate pressure on the profit and loss accounts of a few mid-size public sector banks(PSBs). “The outlook towards these banks remains negative,” it said.
The additional provision requirement may stretch the profitability of a few large PSBs in 2017-18, putting the standalone ratings of these entities under pressure, the agency said.
“There is an increasing divide between the large and smaller PSBs, with the former having some access to growth capital, better market valuation, and also some non-core assets to divest while the latter would only receive bailout capital if required and would need to ration their capital consumption over next two years,” India Ratings said.
The 12 accounts are broadly classified across five sectors, which have been further reclassified as iron and steel, infrastructure and others.
“The weighted average provisioning of 45% (as of March 2017) towards the iron and steel sector exposure continues to be the highest across all sectors, given the deep entrenchment of stress in the sector, low capacity utilisation and high expected ultimate haircuts,” the agency said.
“A going concern approach towards resolution could fetch a more favourable value in comparison to a liquidation approach given the nature of the assets in the sector and the fact that many of the projects in the sector are under stress on account of cash flow mismatches and project overruns,” India Ratings said.
Out of the total Rs 18,000 crore required provisioning, the iron and steel sector contributes around Rs 10,500 crore and the infrastructure sector Rs 4,100 crore. The iron & steel sector had faced severe stress at the time of the ‘Asset Quality Review’ exercise conducted by the RBI last fiscal.
“The weighted average provisioning as of March 2017 for the infrastructure sector exposure is 36%,” it said. “Much of the unrecognised stress (Rs 7.7 lakh crore as of September 2016, 35% of which is expected to slip into the substandard category over the next 12-18 months) forms a part of the infrastructure sector,” the agency said.
Source: Times Of India