Fresh RBI Regulation Tight On Restructured Assets

India’s apex bank, RBI finally came out with the notification, which says that bank should increase the provisioning on the restructured account to 5% from the current 2.75%. Moreover to stop banks from hiding the actual position of their loan books, from first of April 2015 all the account that has been restructured will be classified as sub-standard. The move to tighten the rules for restructuring is to align the Indian rules with the global practices.

Although, all the new restructured account will have to provide a provision of 5%, for old restructured account increase in the provision will be in a phased manner. Banks have to increase provisioning on restructured assets to 3.50% for March 2014, and subsequently to 4.25% and 5% for March 2015 and March 2016, respectively.

This move is definitely going to dent the profitability of the banks. Analysing the restructured books of the Indian banks, it has been observed that restructured account as percentage of loan book has almost doubled in last eight quarters. According to a report at the end of of March 2013, loans worth Rs 2.3 lakh crore of 401 companies have been restructured.

However, it will be the public sector banks that will be more hit than the private sector banks. Especially banks like Punjab National Bank and Central Bank of India that have more than 10% of their loan book are restructured.  On the contrary private sector banks like Kotak Mahindra Bank has no restructured account whereas for the banks like HDFC Bank and Yes Bank has 0.2% and 0.3% of their total loan books are restructured at the end of March 31, 2013. Although, the exact hit on the net earnings of the bank is not possible as some of the books may get upgraded but depending upon the restructured account as percentage of total loan book, banks may get hit of anywhere between 4-10% in next fiscal. There are possibilities that as economy picks up many of these accounts may be upgraded but looking at the GDP growth numbers for FY13 and Q4FY13 released today, economy may not be in hurry to recoup its lost traction. 

Nonetheless, some relief has given to those projects where date of commencement of commercial operation (DCCO) for projects under infrastructure sector as well for projects under non-infrastructure sector are delayed due to legal and other extraneous reasons. Earlier, only six months relaxation was given in such cases, now it is extended till one year, the loan will be treated as standard asset.

We feel the regulation by RBI is in right direction and will check the unrealistic ambitions of entrepreneurs and at the same time will help banks to contain any sudden losses in future.