Fresh RBI Regulation Tight On Restructured Assets

India’s apex bank, RBI finally came out with a notification which says that banks should increase the provisioning on restructured accounts to 5% from the current 2.75%. Moreover, in a bid to stop banks from hiding the actual position of their loan books, it has stipulated that starting April 1, 2015, all accounts that have been restructured will be classified as sub-standard. The move to tighten the rules for restructuring is to align the Indian rules with global practices.

Although, all the new restructured accounts will have to provide a provision of 5%, the increase in provisioning for old restructured accounts will be in a phased manner. Banks will need 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 will definitely dent the profitability of banks. An analysis of the restructured books of Indian banks has observed that restructured accounts as a percentage of the loan books have almost doubled in the last 8 quarters. According to a report, loans worth Rs 2.3 lakh crore of 401 companies have been restructured as at the end of March 2013.

All said, it will be public sector banks that will be more greater than private sector banks. This is especially true of banks like Punjab National Bank and Central Bank of India, which have more than 10% of their loan books restructured. On the contrary, a private sector bank like Kotak Mahindra Bank has no restructured accounts, whereas others like HDFC Bank and YES Bank have 0.2% and 0.3% of their total loan books restructured at the end of March 31, 2013.

The exact hit on the net earnings of the bank is not clear as some of the books may get upgraded. However, depending upon the restructured accounts as a percentage of total loan book, banks may take a hit of anywhere between 4%-10% in the next fiscal. There is a possibility that as the economy picks up many of these accounts may be upgraded. But again, looking at the GDP growth numbers for FY13 and Q4FY13, it appears that the economy may not be in a hurry to recoup its lost traction.

Nonetheless, some relief has given to those projects under infrastructure sector as well for projects under non-infrastructure sector, whose date of commencement of commercial operation (DCCO) is delayed due to legal and other extraneous reasons. Earlier, only 6 months' relaxation was given in such cases, but this has now been extended to 1 year for which the loan will be treated as a standard asset.

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