Higher provisioning over IL&FS exposure could drain bank balance sheets

IL&FS’ consolidated debt is in excess of Rs 90,000 crore, of which over Rs 50,000 crore is with banks.

HYDERABAD: Lenders may have got a temporary breather, being allowed to defer classifying of IL&FS loans as Non-Performing Assets (NPA), but such a move could affect bank balance sheets if they are too long in denial, according to brokerages. In February, the National Company Law Appellate Tribunal (NCLAT) ruled that no financial institution will declare non-payment of dues by IL&FS or its subsidiaries as NPAs without prior approval of the appellate tribunal. However, last month, the RBI filed a review petition challenging NCLAT’s order. 

IL&FS’ consolidated debt is in excess of Rs 90,000 crore, of which over Rs 50,000 crore is with banks. Only a fraction of this exposure has been marked bad and provided for, partly because some of the group entities, particularly special purpose vehicles, continue to honour debt obligations though analysts fear these exposures are negligible. “The spotlight will yet again be on IL&FS exposure and the recognition of and provisions against it,” pointed out HDFC Securities in a note. 

For instance, IndusInd Bank, which has an exposure of over Rs3,000 crore, set aside Rs500 crore till December 2018, but will likely increase its provisioning to Rs700 crore for the March 2019 quarter, denting its profitability. Likewise, Punjab National Bank, which has an exposure of Rs 2,300 crore, too could face the music. “Provisioning will keep earnings under pressure...Asset quality excluding IL&FS will be stable,” noted Kotak Institutional Securities. 

For Bank of Baroda, the just-concluded quarter could have been good but for its exposure to the ailing infrastructure giant. The bank, which lent over Rs4,680 crore, could see slippages and higher provisions against IL&FS exposure, leading to downside risks. Ditto for Union Bank of India. Brokerages are drawing attention towards its treatment of IL&FS loans and provisions being made thereof. 

Notwithstanding the breather from NCLAT, analysts, and to an extent banks themselves, aren’t ruling out the underlying risks against IL&FS loans. Evidence of this came from new IL&FS board last week, which revealed that out of the 340-odd IL&FS group entities, just about 50 had enough capital to continue servicing debts.