MUMBAI: The Reserve Bank has asked HDFC Bank to make additional one-time standard provision worth Rs 500 crore for misclassification of certain agri-sector-related loans as priority sector lending.
ICICI Bank was also asked to provide for Rs 1,283 crore in additional one-time provisions for the same mismatch. But there is a twist in the disclosures: while HDFC chose to brush it aside as part of the overall provisions to the press and regulators, ICICI chose to separately disclose it that its provisions rose because of this particular one-time hit.
But what is surprising is that HDFC Bank chose not to separately disclose the Rs 500 crore of additional provision both in the press statement as well as in the exchange filing last Saturday, wherein it reported an 11.5% jump in net profit, while ICICI clearly stated that it was asked by the RBI to do so in the press statement as well as in the exchange filing of the December quarter results where it had reported a 4% fall in net income due to this.
These are supervisory charges and are not associated with defaults in loans or deterioration in asset quality. The central bank has clarified that the underlying loans are still being serviced and are not non-performing assets.
HDFC’s admission and clarification came during the analysts call last Saturday, wherein it said it was asked by the regulator to identify and address the shortcomings in their loan portfolios. These adjustments are necessary to ensure compliance with priority sector lending (PSL) norms.
“In the future, we need to operate in a model that’s acceptable to the regulator. As a corrective measure, the recalibration of our book is driven by the scale of our finance, to clearly classify what’s genuinely and agricultural loan and what falls outside that remit,” HDFC Bank chief financial officer Srinivasan Vaidyanathan told the analysts without disclosing the quantum of the impacted loan book.
“Provisions fell 10% to Rs 2,840 crore for the December quarter and claimed that this was helped by the release of contingent provisions of Rs 1,040 crore, primarily related to a large borrower group meeting specific conditions. Excluding this release, total credit cost ratio was 0.55 for the quarter,” was all that Vaidyanathan would offer to the press.
Here again, ICICI was forthcoming with reporters, clearing stating that the affected book is around Rs 25,000 crore and some of the loans date back to 2012, but all of them are standard accounts.
ICICI chief executive Sandeep Bakhshi and executive director Sandeep Batra told that “the bank has made an additional standard asset provision of Rs 1,283 crore, taking the total provisions for the quarter to Rs 2,556 crore despite lower NPA ratios, pursuant to the Reserve Bank’s annual supervisory review, in respect of a portfolio of agricultural priority sector credit facilities where the terms were found not to be fully compliant with regulatory requirements for classification as agricultural priority sector lending.
“There is no change in asset classification or in the terms and conditions applicable to the borrowers or in the repayment behaviour of borrowers as per these terms. This additional standard asset provision will continue until the loans are repaid or renewed in conformity with the PSL classification guidelines.
“We are correcting the same to meet the regulatory demand. But all we want to reassert is that the whole book is standard and there is no stress in them nor there is any need for any regulatory provisions,” they said.
The mismatches and misclassification in agriculture loans in the priority sector by the lenders were found during the annual supervisory review by the central bank.
The central bank’s annual supervisory review, which assesses compliance with regulatory norms, including priority sector targets and reporting accuracy.
Under current rules, banks must lend 40% of their adjusted net bank credit to priority sectors, 18% of this allotment targets the agriculture sector. Shortfalls incur penalties or appropriate actions Penalties are put into the rural infrastructure development fund or RIDF.
In case of ICICI Bank, the RBI has found that there were some agricultural loans classified as PSL loans but actually they did not strictly meet the requirements in terms of eligibility. ICCII management said the loans under the RBI action was worth around Rs 25,000 crore which either exceeded the scale of finance requirements or were not fully documented. They said, these loans were working capital loans extended to borrowers who are from the agri-related sectors. And similar is the case with the penalties on HDFC Bank too, an analyst said.
The scale of finance sets crop-wise and land holding-wise ceilings on the amount of credit that can be classified as agricultural lending. Amounts above this are to be considered as non-priority sector lending.
Both banks have accepted the findings made by the RBI and have informed the regulator that corrective steps are being taken. These include tightening internal controls, improving documentation standards, and ensuring agri loans remain within prescribed limits to qualify as PSL. Banks are also expected to revise internal audit and compliance processes to prevent similar misclassifications in future.