Published on 21/04/2017 12:31:34 PM | Source:  Kotak Securities Ltd

Tightening the screws - Kotak Sec

Posted in Special Event Reports | #Kotak Securities Ltd #RBI #Banking Sector #Special Report


Tightening the screws.

The RBI announced (1) additional disclosure requirements for banks that fail to adhere to prudential norms, thus putting the onus on banks to tighten their NPL recognition and provisioning norms and (2) requirement for boards of Indian banks to proactively assess risks across sectors and make provisions above the minimum regulatory standards starting with telecom sector on immediate basis. We view these announcements positively as it leads to tighter compliance, better disclosures and early identification of potential stresses.

 

Stricter disclosures on NPL a positive move

The RBI has noted occasional deviations in banks’ NPL recognition and provisioning from what is prescribed in the existing prudential norms. From FY2017 onwards banks will need to provide new disclosures (as shown in Exhibit 1) where (1) the shortfall in provisions as per RBI norms exceeds 15% of the reported net income and/or (2) there is 15% difference between the reported GNPL and RBI-assessed GNPL.

The guideline requires these disclosures to be made ‘following communication of such divergence by RBI to the bank’ – this raises questions if RBI will henceforth do an AQR-like exercise to determine account-level compliance to norms. We are also unsure how this framework would fit the post-Ind-AS scenario when NPL recognition is expected to be relatively more subjective.

 

Shifting away from a prescriptive approach to provisioning and stepping closer towards Ind-AS

The RBI has asked boards of banks to assess risks in various sectors based on qualitative and quantitative parameters and proactively make provisions above minimum regulatory requirements (Figure 2). This, in our view, would lead to faster recognition of future asset quality issues and will help avoid the cliff effect of large and lumpy provisions. This approach is closer to Ind-AS (to be applicable from April 2018 onwards) which requires a dynamic approach to provisioning based on expected credit losses, instead of the current system based on days-past-due.

 

Addressing the asset quality risk in the telecom sector

Addressing the risks of NPLs in the telecom sector given stressed financial conditions, the RBI has asked banks to review their exposure to the sector and provide higher standard asset provisions to buffer against future slippages. Banking sector debt to telecom stands at ~`820 bn as of February 2017, i.e. 1.2% of total loans. The absolute exposure has reduced over the past one year, but this does not fully capture the risks from non-fund based exposures. Exhibit 3 gives telecom exposures of some banks – IDFC Bank, IndusInd Bank and Yes Bank have higher exposure to the sector. We do not have data on gross NPL in the telecom sector at the system level, but this ratio is quite low (1.4%) for SBI.

 

NPL resolutions need to be expedited to avoid downward spiral for weak PSU banks

In the absence of significant improvement in asset quality, weaker PSU banks will likely face challenges from multiple fronts: (1) risk of dilution at below book values, (2) weak capital position, high leverage and elevated gross NPLs will attract prompt corrective action by RBI, thus restricting their operating freedom, (3) likely negative impact of higher provisioning under Ind-AS.

 

To Read Complete Report & Disclaimer Click Here  

 

For More  Kotak Securities Ltd Disclaimer http://www.kotaksecurities.com/pdf/generaldisclosure.pdf  

 

Above views are of the author and not of the website kindly read disclaimer