The impact of the Reserve Bank of India’s Asset Quality Review, which is at the heart of the “deep surgery” prescribed by the RBI Governor Raghuram Rajan in February as a desperate measure to clean up bank books, could be beginning to show results.
According to RBI deputy governor SS Mundra, even in tier II and tier III towns, promoters have begun to realise the banks are going to come hard after them if they do not observe credit discipline.
For the central bank, the Asset Quality Review exercise at banks — broadly similar to stress tests conducted by the US and European authorities after the global financial crisis — is specifically aimed at tracing the sources of pressure points in the country’s banking sector at an aggregate level.
In the US and European stress tests, the rigour of their respective exercise was markedly different. The American stress tests credibly signaled the health of financial institutions and thereby stemmed the spread of the panic, whereas that in Europe did little to allay market suspicions and fears. Once the test results were announced, the ‘TED’ spread (the difference between the interest rates on interbank loans and on short-term government debt that effectively indicates the perceived risks in lending to banks), the ‘CP’ spread (a similar indicator for business), and the ‘Baa’ spread (indicating perceptions of corporate risk) all fell sharply.
In India, following the asset quality review, banks have reported a near 70 per cent surge in non-performing assets over the last six months. Gross NPAs of banks and institutions have shot up by Rs 2,41,000 crore in these two quarters — December and March quarters of fiscal 2015-16 — mostly due to the aggressive provisioning undertaken by PSU banks at the behest of the RBI.
According to data compiled by Care Ratings, gross NPAs have surged from Rs 349,113 crore in September 2015 when the RBI ordered the asset review to Rs 590,772 crore by March 2016.
In effect, the asset quality review of banks is an annual exercise. The only difference in the process this time is that instead of spacing it over the year, the RBI has pooled it. Doing it together has given the advantage that some of the accounts, rather than looking at them in isolation, is now being viewed in totality across the banking system.
The RBI’s observations were then discussed and shared with the banks and then they were encouraged to proactively and conservatively look at these accounts, classify them appropriately and then prepare themselves for the future possibility or weakness arising by way of enhanced provisioning, officials involved in the exercise said.
The RBI action in terms of the decisive asset quality test, followed a number of pre-operative procedures initiated by the Central bank earlier. It started with creation of the CRILC (Central Repository of Information on Large Credits) database, which enabled compilation of information on level of indebtedness of various groups to the financial system. This was followed by the issuance of detailed guidelines on a framework for revitalising distressed assets in the economy, which were aimed at improving the system’s ability to deal with corporate and financial institution distress. Detailed guidelines on formation of Joint Lenders’ Forum (JLF), corrective action plan (CAP), ‘refinancing of project loans’, ‘sale of NPAs by banks’ and other regulatory measures were also issued to banks for enabling prompt steps for early identification of problem cases. Alongside, the 5/25 scheme and the Strategic Debt Restructuring scheme were also introduced with the aim of controlling the stress levels in the sector.
It is after the pre-operative procedures that the RBI undertook the Asset Quality Review at banks. The government, on its part, has extended its support by committing to infuse capital in the weaker public sector banks. So while there has been some impact in terms of promoters who are guilty of not observing credit discipline beginning to feel the heat, senior RBI officials have pointed to sceptics questioning whether it was the right time for the RBI to undertake this initiative, especially at a stage when the economy is growing slowly. But then the RBI has also come under fire for letting things drift and banks being allowed too much of forbearance.
All of this comes at a time when the NPA ratios of at least four banks are said to be in a precarious position. The Indian Overseas Bank has gross NPAs of Rs 30,049 crore — working to about 17.40 per cent of its overall advances. UCO Bank’s gross NPA ratio is 15.43 per cent, UBI 13.26 per cent and Bank of India 13.07 per cent. Punjab National Bank, Canara Bank and Allahabad Bank have seen their bad loans nearly doubled after the review. The State Bank of India, which showed some stability in NPA levels before the RBI asset quality review, added Rs 42,000 crore to the overall NPA level of Rs 98,172 crore after the provisioning was beefed up by the RBI.
The RBI’s quarterly review, slated for Tuesday, is likely to spell out further clarity on the progress on the Asset Quality Review.
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