The RBI's latest notifications to force banks to report deviations from prescribed asset quality norms and under-provisioning for bad loans, and take in higher standard asset provisioning across risky sectors, particularly in telecom, point to the implemention of Indian Accounting Standard (Ind-AS) next year, a US consultant said on Wednesday.
"Starting March 2017, banks will need to report differences, if they exist, if (a) additional provisioning assessment exceeds 15 per cent of reported net income, or (b) additional incremental NPL (non-performing loans) identified exceeds 15 per cent of reported NPL increase for the reference period," American investment banker Jefferies said in a research note.
"It's a good start, but unfortunately, banks will currently only report the AQR (asset quality review) differences of FY16, which is not convincing enough that banks will come clean," it said.
The non-performing assets (NPAs), or bad loans, of state-run banks at the end of last September rose to Rs 6.3 lakh crore (almost $100 billion), as compared to Rs 5.5 lakh crore at the end of June 2016.
"Banks are to take in higher standard asset provisions, and build higher provisions on telecom sector owing to current distressed financials," Jefferies said regarding a related RBI notification.
"In our opinion, this rule is perhaps an early experiment starting with the telecom sector, as banks move towards Ind-AS implementation wherein they need to work with 'Excepted Loss' behavior instead of 'Realized Loss," it said.
Ind-AS are the accounting standards applicable for companies in India.
The RBI on Tuesday cautioned banks about loans given to companies in sectors in difficulty such as telecom that may witness rising bad loans.
Banks were asked to put in place a board-approved policy for making provisions for standard assets at rates higher than the regulatory minimum, based on evaluation of risk and stress in various sectors.
"The telecom sector is reporting stressed financial conditions, and presently interest coverage ratio for the sector is less than one," an RBI notification said.
"Board of directors of the banks may review the telecom sector latest by June 30, 2017, and consider making provisions for standard assets in this sector at higher rates so that necessary resilience is built in the balance sheets should the stress reflect on the quality of exposure to the sector at a future date," it said.
"Besides, banks should also subject the exposure to the sector to closer monitoring," it added.