37 banks and a whopping Rs 1.3 trillion jump in gross NPAs!

The RBI has been critical of banks for using restructuring schemes to hide the stress.

Illustration: Uttam Ghosh/Rediff.com

Weighed down by the Reserve Bank of India’s (RBI’s) new rules on restructured assets, domestic banks, both public and private, added over Rs 1.3 trillion in gross non-performing assets (NPAs) in the fourth quarter ended March.

Provisions and contingencies, amounts set aside for NPAs, also rose to Rs 1.4 trillion in the final three months of 2017-18, according to a review of the performance of 37 listed banks.

While the provisions and contingencies figure includes those for tax, standard assets and loss in value of investment such as government securities, a large chunk of it is for stressed loans, including NPAs.

Gross NPAs currently stand at Rs 9.81 trillion. The amount would move up as two banks, Indian Overseas Bank and Jammu and Kashmir Bank, are yet to announce the results.

The addition to net NPAs was about Rs 45,500 crore during January-March. The net NPAs of these listed banks stood at Rs 4.95 trillion at the end of March.

Besides slippages (loans turning bad in the normal course of business), the rewriting of rules for treating restructured loans and recognition of exposure to jewellery firms belonging to Nirav Modi and Mehul Choksi as fraud also pushed up the NPA tally and provisions, bankers said.

According to Karthik Srinivasan, senior vice-president and group head, financial sector ratings, ICRA, this reflected the cleaning up of balance sheets of banks.

On February 12, the RBI revised rules for standard restructured advances, thereby ending the recast schemes.

So stressed accounts where the SDR, S4A and 5\25 schemes were yet to be implemented had to be treated as non-performing assets.

Public sector bank executives said the new rules had a three-fold effect. First, it pushed up the tally of outstanding NPAs. Second, banks had to reverse part of the interest income booked on such loans.

Finally, the provision burden for NPAs ballooned since standard restructured advances were now treated as sub-standard. More chronic loans moved straight into the doubtful category, for which provisions requirements are steep.

Banks are required to classify NPAs into three categories - sub-standard, doubtful and loss assets - based on the period for which the asset has remained non­performing and the prospects of recovering dues.

The percentage of provision for these categories goes up based on the category of the asset.

Delhi-based Punjab National Bank with an addition of Rs 29,100 crore in the fourth quarter topped the charts in slippages.

It faced the double whammy of exposure to Nirav Modi and Mehul Choksi firms being treated as fraud, as well as new rules for stressed loans.

State Bank of India also saw elevated slippage of Rs 24,200 crore, followed by Axis Bank with Rs 9,250 crore.

The RBI has been critical of banks for using restructuring schemes to hide the stress.

Deputy Governor N S Vishwanathan, during a speech at the National Institute of Bank Management, Pune, in April, had said, “The general approach of bankers to stress in large assets has been one of avoiding the de jure recognition of non-performance of such accounts.

"This is why we have a history of a large number of cases of failed restructuring as the schemes were used for avoiding a downgrade rather than resolving the asset.”

Prolonging true asset quality recognition suited both bankers and borrowers.

The former could make their books look cleaner than they actually were; the latter could avoid the defaulter tag even while, in fact, defaulting.

In most cases where the strategic debt restructuring (SDR) scheme was invoked, there was no change of management. It meant that the scheme was used only for the asset classification benefit during the standstill period of 18 months.