RBI strengthens norms; reviews 240 loans

Government has taken note of Standard & Poor’s (S&P) Global Ratings, a prominent global rating agency, which states, inter-alia, that “the worst is almost over for India’s banks”.

The Minister of State for Finance, Shiv Pratap Shukla, appraised parliament on S&P views on 3 Aug 2018.

The S&P report said India’s weakened banking system is set to strengthen over the next couple of years as stressed loans are cleared and capital injections from the government shore up eroded capital bases.

“We estimate that Indian banks’ recognized nonperforming loans (NPLs) now cover a substantial part of weak loans in the system, which comprise about 13%-15% of total loans,” said S&P Global Ratings Credit analyst Geeta Chugh in the report.

Banks categorized an increasing proportion of weak loans as NPLs due to more stringent requirements by India’s central bank and government.

In our view, this more realistic recognition, coupled with rebounding corporate profits, and quicker resolution of nonperforming assets under the new bankruptcy law, will help banks gradually recover from a protracted bad-debt cycle.

“We believe the Reserve Bank of India’s strengthening norms and more stringent timelines mean that banks will increasingly find it more difficult to window-dress accounts to hide the true level of weak assets,” said Chugh.

The central bank is reportedly conducting another asset quality review, focusing on 240 corporate loans.

Many of these loans are already classified as NPLs, but the RBI is said to be investigating whether they are under-provisioned.

Another year of high provisioning is likely as public sector banks clean up their balance sheets and provide for losses on their stressed assets.

Other drags on earnings include lower treasury income amid rising interest rates.

A turnaround in the earning performance of India’s banks should take place in fiscal 2020 (ending March 31, 2020). This turnaround could be delayed if large unexpected NPLs materialize in the agriculture sector, where for example government-granted loan repayment waivers could hurt credit discipline.

The loan-against-property segment may also be vulnerable.

The government is working on a four-pronged strategy to improve the health of the banking sector: recognition, recapitalization, resolution, and reform.

The first three of the “4Rs” has progressed significantly, but in our view, India hasn’t done enough with respect to reform.

Our stable outlook on banks is underpinned by our expectations of a very high likelihood of government support.

“The government’s ongoing recapitalization program of Rs.2.1 trillion (US$32 billion) will help shore up depleted capital positions,” said Chugh.

“While we no longer think this program is sufficient to meet the sector’s capital needs, we believe the government could arrange additional support as needed.”

“We believe the risk to our view is on the upside: ratings are more likely to be raised than lowered in the next two years. That said, weak risk management and internal-control practices limit the potential for considerable upside.” fiinews.com