Provisions by banks jump 30% to Rs 64,500 crore in Q2

This can result in losses before taxes of Rs 30,000-40,000 crore for public sector banks during FY18, even as the return on equity (RoE) is expected to moderate for PVBs to 9.4-10.2 per cent during FY18 against 12 per cent in FY17, he said. “With losses before taxes of Rs 5,500 crore during Q2 FY18 and Rs 5,800 crore in H1 FY18, PSBs are weakly positioned on their capital ratios with seven PSBs (out of 21) and 12 PSBs below the regulatory minimum capital level required for March 2017 and March 2018 respectively,” he said.

Fresh slippages during Q2 FY2018 at 3.9 per cent (annualised) against 6.3 per cent (annualised) during Q1 FY18 and 5.5 per cent+ for FY17 were the lowest since the beginning of the Asset Quality Review (AQR) initiated by the Reserve Bank of India (RBI) during Q3 FY16, he said. Further, more than 80 per cent of the slippages during the quarter were outside the standard restructured advances. Accordingly, the asset quality pain is likely to continue in the near term with Rs 170,000 crore of standard restructured advances. Gross non-performing assets (GNPA)s of Rs 880,000-900,000 crore (10.0-10.2 per cent) to peak out by end of FY18 as against NPAs of 9.5 per cent (Rs 765,000 crore) as on March 31, 2017, Srinivasan said.

In contrast to the sectoral trend of reduced fresh slippage, the private banks (PVBs) reported a sequential increase of fresh slippages during Q2 FY2018, partially driven by recognition of divergences in asset classification under the risk-based supervision (RBS) conducted by the RBI for some private banks, ICRA said.

“While the addition to fresh GNPAs may be moderating, limited resolution of these NPA accounts as reflected by lowest quarterly recoveries and upgrades during last five years and; the consequent ageing of the NPAs, the credit provisions has surged for the sector,” he said. The loan write-offs too touched all-time high during the quarter, which coupled with RBI’s directive of higher provisioning on the accounts to be resolved under Insolvency and Bankruptcy Code (IBC) 2016 led to rise in provisions during the quarter, Srinivasan said.

According to Srinivasan, with the recent amendments in IBC, with debarring defaulting promoters to submit a resolution plan, the likelihood of the higher losses and a further increase in credit provisions appears to be a likely possibility. “Further, a limited resolution seen in the second list of stressed borrowers may also force banks to refer to these borrowers under IBC, further adding to the provisioning requirements. While debarring defaulting promoters may add to short-term pain for banks, it may discourage overleveraging by borrowers and is likely to be good for the overall credit culture in future,” he said.