Provisioning to increase by 25% for banks this fiscal; amortisation could provide some breather The Reserve Bank of India (RBI) recently referred 12 large NPAs in the banking system for resolution under the Insolvency and Bankruptcy Code, 2016 (IBC), based on the recommendations of its internal advisory committee (IAC). A time-bound resolution of these cases will indeed be a big positive for bank balance sheets.

CRISIL's study show that banks have already provisioned ~40% for these NPAs worth ~Rs 2 lakh crore, or equal to a quarter of the NPAs in the banking system, before the RBI's move.

Krishnan Sitaraman, Senior Director, CRISIL Ratings, said, ''Based on CRISIL's assessment of embedded value in the top 50 NPA cases, we estimate a 60% haircut would be needed on these loan assets. That would mean banks will have to increase provisioning by another ~25% this fiscal, compared with 9% in the last.''

But the impact of that could be mitigated if banks are allowed to amortise the provisioning across 6 to 8 quarters.

The IAC, set up by the RBI, has reviewed the top 500 exposures that are partly or wholly classified as NPAs, and given its recommendations which include the referral of the top 12 NPAs for resolution under the IBC.

The IAC also recommended that for the other corporate NPAs, banks should finalise a resolution plan within six months and where a viable resolution plan is not agreed upon within that period, banks should initiate insolvency proceedings under the IBC.

With this step, the RBI has addressed the reluctance of banks to further mark down the asset values of these NPAs by having an oversight committee to provide guidance. Additionally, it sends a strong signal to borrowers to adhere to credit discipline, and also encourages banks to break resolution deadlocks with definite timelines.

Rama Patel, Director, CRISIL Ratings, said, ''While the IBC route could entail a substantial markdown of loan assets by banks, the ability, especially of public sector banks, to absorb such losses and the consequent impact on their capital position will need to be monitored closely in the road ahead.''

The RBI's definitive actions are a continuation of a series of measures announced by it in the recent past such as reporting of divergence in NPAs with the RBI’s own estimates, and increase in standard asset provisions for vulnerable sectors to encourage a clean-up of bank balance sheets and strengthening credit discipline.

On May 10, 2016, CRISIL had, through a press release ('Bankruptcy code shot in the arm for ARCs, lenders') said that the IBC will structurally strengthen the identification and resolution of insolvencies in India.