The RBI’s move to hike the provision that banks need to make for restructured loans is credit positive for Indian banks, Moody’s Investor Services has said.
The is because the increased provisioning will strengthen their loss absorption capacity, the international rating agency said in a note to its research clients.
At the recent monetary policy review, the Reserve Bank of India hiked the provisioning on restructured loans from 2 per cent to 2.75 per cent.
The move will add to bank managements’ incentive to improve loan underwriting standards to strengthen asset quality, Moody’s credit outlook said.
Increased provisioning on restructured loans would result in Indian banks reporting lower net profits. But banks’ overall loss absorption capacity will benefit from higher provisioning cover, the rating agency said.
The deterioration in Indian banks’ asset quality is characterised not only by a 46 per cent jump in gross non-performing assets (NPAs), but also the more than doubling of restructured loans over the past year.
For public sector banks, as much as 6-10 per cent of their gross loans are restructured loans.
The RBI move is also noteworthy in its timing, Moody’s said. This is because the central bank decided to implement the recommendation ahead of other recommendations from its working group.
If this signals an increasing policy push on banks to improve their internal risk monitoring processes, that would be good news for bank creditors, Moody’s credit outlook said.
An RBI working group tasked with reviewing the existing prudential guidelines on restructuring of loans in July submitted a report recently.
The working group had, among other recommendations, proposed an increase in the provision on restructured loans to 5 per cent from 2 per cent over a two-year period.