MUMBAI: The most difficult part of NPA resolution has just begun. As per estimates, haircuts worth at least H1 lakh crore or above aren’t ruled out, but whether banks will bite the bullet remains to be seen.
Steel firms dominate the 12 accounts that RBI has identified for speedier resolution and brokerages estimate that lenders may have to take at least 50-60 per cent haircuts of the H2 lakh crore worth bad loans. If one were to consider other large NPAs, write-offs could be staggering.
“If resolutions were to take place, we believe these assets would need to take 60 per cent haircuts, resulting in additional provisions (we estimate banks will need Rs 35,000 crore additional provisions),” said Credit Suisse in a note.
While banks have instituted 70 per cent provisioning on the reported NPAs, additional provisions are still required. For instance, provisioning on steel assets for banks is lower at 30 per cent. To stem deterioration, RBI is likely to relax provisioning norms, but its effectiveness is uncertain.
“We expect the (RBI) directive will negatively affect banks’ profitability over the next year if they need to take large write-downs relative to their existing loan-loss reserves for those assets,” said Alka Anbarasu, Vice President - Senior Analyst, Moody’s Investor Service.
According to Aditya Narain, Head of Research, Banking and Financial Services, Edelweiss Securities Ltd, “the IBC process passes on the baton of recovery from banks to promoters and mandates banks to reach a definite decision, while agreeing on a suitable haircut.”
He added that this may call for slightly higher provisions based on potential haircuts, leading to higher capital requirement.
“With expectations of fresh slippages at 3-4 per cent of advances for FY2018, credit provisions required on the earlier NPAs and relatively lower treasury gains, the possibility of another year of losses or low single digit return on equity for public sector banks (PSBs) is not ruled out,” said Karthik Srinivasan, Group head – Financial Sector Ratings, ICRA Ltd.
State-run banks need at least H1 lakh crore by next fiscal-end against the government-budgeted capital of H20,000 crore. Considering the situation, the government has reportedly written to RBI seeking relaxation in capital requirements. Banks, though flush with funds from demonetisation, are refraining from lending. PSB credit growth was less than one per cent, while private peers clocked 15 per cent in FY17. Only six PSBs out of 21 saw credit growth higher than industry average of 5.1 per cent.