Bad loan divergence likely at most banks after RBI review


Mumbai: Fresh additions to bad loans are likely to increase across the banking sector this year as the Reserve Bank of India (RBI) finishes its supervisory assessment of lender accounts, analysts say.

Axis Bank Ltd is an example. On Tuesday, the lender reported that its bad loan divergence—the difference between RBI’s assessment and that reported by the lender—was around Rs5,630 crore at the end of March. Similarly, the divergence in provisions made to cover the bad loans was Rs1,318 crore.

Most banks are expected to feel the impact of the central bank’s so-called annual risk-based supervision; the timing of the loan reclassification will depend on the completion of the exercise.

“Theoretically, the divergence is expected to be an industry-wide phenomena. Corporate-focused banks will see similar impact either in the second or third quarter. We all were hoping that we are at the bottom of NPA problem . But new things are cropping up. Our assessment is that the profitability of banks will be under pressure in the near to medium-term,” said Asutosh Mishra, lead analyst, institutional at Reliance Securities Ltd.

According to Saswata Guha, director, Fitch Ratings, it is unlikely the regulator will single out a bank; hence, other banks with such divergences will also reclassify accounts.

Subsequent to completion of the regulatory exercise, Axis Bank reclassified nine accounts with outstanding balance of Rs4,867 crore as non-performing in the fiscal second quarter. These accounts contributed nearly 54% of second quarter slippages.

According to analysts, since the nine accounts reclassified as non-performing assets (NPAs) by Axis Bank were consortium loans, other banks that advanced money to the borrowers may also tag them bad.

A majority of these accounts, spread across sectors such power and steel, among other, were standard for most banks, which were part of a consortium as of 30 June, Axis Bank said. Only 6% of the outstanding sums were classified as NPAs.

Earlier this year, banks had reported similar divergence in May based on fiscal 2016 results after the RBI on 18 April told lenders to state bad loan divergences in their financial statements if it exceeded 15% of what they reported.

IDBI Bank Ltd, ICICI Bank Ltd, Axis Bank, RBL Bank Ltd and Yes Bank Ltd made such disclosures.

Indian banks are sitting on a pile of stressed loans of over Rs10 trillion, of which Rs7.79 trillion were gross bad loans as of the end of June.

Suresh Ganapathy, an analyst at Macquarie Capital, said asset quality issues are still acute for Axis Bank as well as for the entire banking system. “Divergence is a matter of interpretation. Some banks would have shown it as NPA during normal course of operation, while some will do under the RBI inspection. But the bigger point is that the asset quality problem is high in the system and irrespective of the RBI inspection, these problems will come out,” he said.