Is RBI In The Midst Of Another Asset Quality Review?
The Reserve Bank of India is in discussions with banks over another pool of stressed assets to check whether banks have classified them appropriately and provisioned adequately against them. The queries from the regulator follow a three-year long process of cleaning up bank balance sheets, which has led to reported bad loans across the banking sector rising to over Rs 10 lakh crore.
According to three public sector bankers, who spoke to BloombergQuint on conditions of anonymity, the regulator has sent a list of stressed accounts to each bank individually and sought details regarding asset classification and provisioning. Lenders are in the process of submitting their responses to the regulators’ queries, the three bankers quoted above said.
BloombergQuint could not ascertain the total number of accounts since each bank has received individual lists. However, the number of accounts is large, the bankers quoted above said.
Once the RBI has received their responses, it will assess them and decide on the future action required against these loan accounts. Some of these loans are already classified as non-performing assets, while a few others may have been regularised.
BloombergQuint sent an email to the RBI on Monday morning. A response is awaited.
A Check On Provisioning?
According to two of the three bankers quoted above, the current round of queries are focused more on provisioning rather than asset classification. The result could be elevated provisions being made against some large corporate accounts during this financial year, they added.
A fourth person familiar with the matter said that if the RBI feels that banks had delayed labeling these accounts as NPAs, the regulator may insist on lenders backdating the classification. This would also, in turn, mean higher provisions in keeping with the RBI’s rules.
The income recognition and asset classification (IRAC) norms requires banks to set aside 15 percent of a loan exposure as provisioning in the first year of an account being classified as NPA. The amount of provisioning increases with each year that the account continues to be an NPA. By the fourth year of a bad loan, banks are required to fully provide against the underlying loan amount.
While provisioning levels vary across individual banks, the system-level provision coverage ratio is still on the lower side. As of March 2018, this ratio stood at around 48 percent for the entire banking sector, showed data in the RBI’s Financial Stability Report.
The central bank had conducted its first asset quality review in October 2015, where a list of stressed accounts had to be classified as non-performing assets before March 2016. Similar action was undertaken for the financial year 2016-17.
Following the detailed review started by the RBI, banks saw their NPA figures shoot up drastically. Between the quarter ended September 2015 and the quarter ended March 2018, gross NPAs of all listed banks have gone up from Rs 3.4 lakh crore to Rs 10.2 lakh crore, shows data compiled by BloombergQuint.
The asset quality checks have also resulted in 11 public sector banks being put under the regulator’s prompt corrective action framework intended for weak banks.