Covid-19 crisis: Slippages may jump to Rs 5.5 trillion, says India Ratings

Credit costs could touch Rs 2.7 trillion.

Stress emerging from the severe economic shock caused by steps to contain the pandemic may drive total slippages to Rs 5.5 trillion in FY21.
The corporate side may see slippages of Rs 3.4 trillion, and non-corporate side — retail, farming and MSMEs — may account for Rs 2.1 trillion, according to India Ratings.

Banks faced elevated provision pressure (amount set aside for stressed loans) resulting from the corporate stress cycle, from FY16-FY20. For this, they had made substantial provisions and were moving towards a moderated credit cost cycle.

However, the Covid-related measures are likely to result in another cycle of stress. Additionally, the pressure on non-corporate segments, which were already visible before the outbreak, is likely to intensify, said the rating agency.

With a significant drop in economic activity, most sectors in India are expected to experience varying degrees of revenue contraction in FY21, on account of demand and supply disruption. This presents a fresh challenge to banks, which, over the last four years, have been reeling from corporate stress.

Referring to an analysis of 30,000 firms, the rating firm said the total stressed corporate pool may increase from 3.8 per cent of the total bank credit in December 2019, to 6.6 per cent in the post-Covid phase.

The incremental stress is mainly from sectors including power, infrastructure, constructions, hospitality, iron and steel, telecom, and realty.

Referring to non-corporates, it said stress and slippages would aggravate in retail, agriculture, as well as in the micro, small and medium enterprises (MSME) segments. About 40 per cent of incremental slippages could come from non-corporates.

Bad bank may start with Rs 60K-crore NPAs; govt may put in Rs 10K crore

Banking lobby group Indian Banks' Association (IBA) is expected to take the proposal, which is on the lines of the Sashakt panel recommendations, to the finance ministry this week.

Banks are likely to move big-ticket bad loans amounting to over Rs 60,000 crore to an asset reconstruction company (ARC), which will focus on turning around non-performing assets (NPAs) and enhancing value. Banks are likely to transfer more stressed assets going forward.

The government could invest up to 50 per cent of the capital in the “bad bank” with a contribution of about Rs 9,000-10,000 crore, said sources.

The ARC is expected to take up both old and new cases, bankers said.

Banking lobby group Indian Banks’ Association (IBA) is expected to take the proposal, which is on the lines of the Sashakt panel recommendations, to the finance ministry this week.

The panel had recommended that large bad loans could be resolved under an ARC. The IBA plan envisages setting up of three entities — an ARC, an asset management company (AMC), and an alternative investment fund (AIF) to acquire bad loans from banks with an aim to turn around those assets.

The ARC will acquire and aggregate the asset, the AMC will manage the assets — including takeover of management or restructuring of assets, and the AIF will raise funds and invest into securities floated by the ARC.

The proposed ARC will have to be backed by the government. A similar arrangement was done in the case of IDBI Bank where a stressed assets management fund was created, bankers added. The coronavirus pandemic is expected to result in a rise in NPAs of banks despite steps like allowing a 90-day moratorium on retail loans and relaxing working capital financing norms.

Delay in regulatory leeway likely to prove costly affair for banks

With loan growth and asset quality likely to take a hit, FY21 earnings estimates are coming under the knife.

The sharp rally in banking stocks, which rose 10-12 per cent, in the first half of Thursday’s trade did not sustain fully as hopes of relief or bailout measures for the sector from the finance minister did not materialise. The minister though has kept the option open for more relief measures as and when needed, which suggests that some relaxation (from the Reserve Bank of India or RBI) on asset classification norms (critical for classification of non-performing assets or NPA) may come through for the sector. While hopes of some relief have been around for over 10 days, any further delay could prove costly for banks.

Analysts are already downgrading their earnings expectations, with private banks likely to see a sharper cut. In fact, an across-the-board earnings downgrade is also the first of its kind for private banks.

The nation-wide lockdown, which was initially to be more a problem for small and medium enterprises (SME) exposure of banks, is beginning to spread. “The current pan-Indian lockdown will certainly affect cash flows of borrowers, both individual and corporate, which may lead to an increase in corporate as well as retail NPAs,” say analysts at ICICI Securities. “The lockdown will adversely impact most sectors and may not be restricted to chemicals, textiles, electronics, and entertainment,” they add.

The last time when banks received dispensation on asset recognition was in 2016, after demonetisation. The RBI gave a 90-day window for classifying certain retail loans as NPAs.

“Without a similar dispensation being extended from the March quarter, banks could find it very difficult to sail though,” said a top executive of a state-run bank. Another senior banker said unless such dispensations are soon given, it may be difficult, especially for private banks, to lend support to customers. While most state-owned banks have come out with special schemes for their customers battling the lockdown, private banks are yet to act. “The longer it takes to roll out these relief measures, the prolonged will be the period of dull growth for banks,” he adds while mentioning that business volumes have been quite negligible in the last two weeks.

ICAI to review YES Bank's financial statements for FY18 and FY19

Firms say there are limits to audits identifying ever-greening of loans, or flagging suspect collateral securities.

The spotlight is back on the role of auditors in flagging the ongoing crisis at YES Bank. The accounting standard regulator, the Institute of Chartered Accountants of India (ICAI), plans to review the financial statements of YES Bank for the financial year 2017-18 (FY18) and FY19, and check whether there have been any lapses on the part of the auditors.

The audit fraternity points out that one of the key challenges in undertaking audit of banks relates to reconciling divergences between the Reserve Bank of India (RBI) and the banks when it comes to recognition of non-performing assets (NPAs).

“Over the last two-three years we have been under a lot of pressure from the RBI in matters relating to divergences. As a result, whenever in doubt we approach the RBI for guidance on suspect transactions,” said an auditor from one of the Big Four audit firms.

The auditors are also increasingly seeking information on a group’s loan exposure, than just the company they have the audit mandate for.

An RBI assessment for FY16 pegged the NPAs of YES Bank at Rs 4,925 crore as against the Rs 748 crore gross NPAs reported by the bank. The divergence ballooned to Rs 6,335 crore at the end of FY17.

To check instances of evergreening of loans, auditors said they have started keeping a tab on the money trail of loan payback. “We have started taking a close look at where the money is coming from,” said the audit head of another Big Four firm.

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However, the auditor fraternity concedes that as statutory auditors there are limits to which they could check the money trail. They also rue lack of guidance in this respect from the accounting standard regulator.

What auditors also find challenging is to ascertain intrinsic value of securities that are put forth against loans. “This is more so in an economic environment where repayment power of business is weak,” said another audit professional. Statutory auditors of YES Bank have already had a rough ride over the past few years. BSR & Co, an affiliate of KPMG India, is the current auditor of YES Bank. However, the previous auditor, SR Batliboi & Co, an EY affiliate, was hauled up by the RBI on account of lapses in statutory audit. Following this, the firm was banned for one year from carrying out statutory audit assignments of commercial banks.