The Reserve Bank of India has started a review of over 200 stressed assets of top business groups in the banking system to assess the provisioning level and classification of assets.
The regulator has already sent letters to banks to gauge the level of action by lenders to clean up the banking system, said a banking source. Each bank is expected to clarify the position separately. “This could be the second major asset quality review after former RBI Governor Raghuram Rajan kicked off the first review in 2015,” said an official of a nationalised bank.
The RBI has included several top business groups in the ongoing asset quality review which, based on the replies of the banks, could lead to bankruptcy proceedings in many cases. Most of these accounts have already been declared as non-performing assets (NPAs) by banks. The RBI did not respond to emailed queries.
The RBI had initially sent a list of 12 defaulters for resolution under the Insolvency and Bankruptcy Code (IBC). Out of this, 11 accounts are in various stages of resolution at different benches of the National Company Law Tribunal (NCLT). Bankers are expecting over 50 per cent recovery from these accounts.
The regulator subsequently sent another list of 28 stressed accounts for resolution. However, banks don’t expect more than 25-30 per cent from these accounts. Some of these accounts were evergreened — or fresh loans disbursed to repay old loans — by banks to prevent them being classified as bad loans. The fresh exercise by the RBI comes at a time when gross non-performing assets in the banking system has risen to around Rs 10.3 lakh crore, or 11.2 per cent of advances compared with Rs 8 lakh crore, or 9.5 per cent of advances, as on March 31, 2017.
In FY18, the banking system reported a net loss of Rs 40,000 crore because of the sharp rise in NPAs and the resulting increase in provisioning costs. In the previous fiscal, as much as Rs 5 lakh crore of bank loans slipped into the NPAs category, taking the total slippages in the past three fiscals to Rs 13.6 lakh crore, Crisil has said.
In June, the RBI’s Financial Stability Report (FSR) warned that “the stress in the banking sector continues as gross NPA ratio rises further. Profitability of banks declined, partly reflecting increased provisioning”. RBI’s macro-stress tests indicated that under the baseline scenario of current macroeconomic outlook, gross NPA ratio of banks may rise from 11.6 per cent in March 2018 to 12.2 per cent by March 2019.
Nearly a dozen PSU banks are under the prompt corrective action (PCA) of the RBI.
The PCA framework could help to mitigate financial stability risks by arresting the deterioration in the banking sector, so that further capital erosion is restricted and banks are strengthened to resume their normal operations.