The Reserve Bank of India (RBI) stipulation that banks maintain higher provision of 10 per cent over the two quarters of March and June 2020 on loans that have been granted a three-month moratorium could drill a huge hole, ranging from Rs 36,000 crore to Rs 72,000 crore, in their profitability, Brickwork Ratings (BWR) has cautioned.
Assuming that special mention accounts are around 4 per cent (scenario 1) and 8 per cent (scenario 2), respectively, of total banking advances and have been accorded the loan moratorium, BWR assessed that the additional provisioning on such accounts could hit banks’ profitability by about Rs 36,000 crore in scenario 1 and Rs 72,000 crore in scenario 2.
SMA accounts are those where the principal or interest payment or any other amount is wholly or partly overdue between 0-90 days. Total banking advances were at about Rs 90 lakh crore as on February 28, 2020, BWR said. SMA accounts were higher in public sector banks vis-à-vis private sector banks, it added.
Vydianathan Ramaswamy, Director, BWR, said such a large hit on profitability would impair the capital positions of banks, especially public sector banks (PSBs), many of which continued to report losses for the nine months ended December 31, 2019. It may also necessitate further capital infusion into weak PSBs, he added.
BWR, in a note, said asking banks to create a 10 per cent provisioning on all loans that are overdue but not yet NPA and wherein moratorium has been approved, could severely pinch banking sector profitability for FY2020 and FY2021.
While the provisioning could be adjusted against provisioning for slippages to NPAs during fiscal 2021, the agency said the banking sector’s ability to manage asset quality in the near term following the moratorium period remained a critical monitorable.
On the relaxation on non-performing assets (NPAs) classification norms for banks -- the 90-day NPA norm will exclude the three-month moratorium period provided by banks -- the agency said: “It will provide asset quality respite to the banking system during the moratorium period.
“However, the banking system’s ability to manage asset quality and control NPA accretion post the moratorium period will be a critical monitorable.”