The Reserve Bank of India did banks a good turn by allowing them to reclassify some loan accounts, especially those facing delays in the date of commencement of commercial operations, as performing or standard assets.
The loan reclassification, which will help save on the provisioning burden, couldn’t have come at a better time as they are in the midst of finalising their annual financial results.
This move is expected to have a salubrious impact on the fourth quarter financial results of banks, especially from the public sector.
Following the reclassification of certain loan accounts, banks now would need to set aside only 0.40 per cent (of the outstanding loan amount) as provision for a standard loan, against 15 per cent for a bad loan.
Under its asset quality review (AQR), the RBI asked banks to ensure uniformity in asset classification in the case of large loan accounts under multiple/consortium lending. It sought to correct the anomalous situation arising from the treatment of loan accounts as ‘standard’ by some banks and ‘bad’ by others. The review was part of the RBI’s attempt to get the banks to clean up their balance sheets by March 2017.
This resulted in banks, especially from the public sector, downgrading large accounts in the third quarter. As a result, public sector banks had to make loan loss provisioning, resulting in them either posting huge losses or substantial slide in net profit in the third quarter ended December 2015. For example, Bank of Baroda reported a net loss of ₹3,342 crore, Bank of India (net loss: ₹1,506 crore), and IDBI Bank (net loss: ₹2,184 crore).
For all projects financed by banks, the RBI requires them to clearly spell out the ‘Date of Completion’ and the DCCO (date of commencement of commercial operations) of the project at the time of financial closure of the project and the same should be formally documented. These should also be documented in the appraisal note by the bank during sanction of the loan.
DCCOs of many large projects, especially in the infrastructure sector, were impacted in the last four-five years due to delays in receiving statutory clearances, including those relating to environment, and legal challenges mounted to the allotment of mines.
A senior public sector bank official said: “It is the public sector banks which rose to the challenge of financing the infrastructure/core sector projects. If there have been DCCO delays, which directly impinge on the loan servicing ability of projects, it does not mean that the banks got their credit appraisal wrong. By allowing re-classification of some loans, the RBI has taken cognisance of our predicament.”
Stocks surgeThe S&P BSE Bankex (the banking index of 10 bank stocks) rose 1.95 per cent on Thursday on the back of the RBI allowing reclassification of some loan accounts. ICICI Bank stock gained the most (up 6.26 per cent), followed by Punjab National Bank (5.10 per cent), Federal Bank (4.55 per cent), State Bank of India and Bank of Baroda (3.68 per cent) and Bank of Baroda (2.08 per cent).