31 May 2017 20:19 IST

Hullaballoo over the NPA mismatch

While the private sector banks’ disclosures on bad loans have rattled investors, the worst may be over



Recently, few private sector banks were in focus as they had diverged significantly from RBI norms in asset classification and provisioning for the 2016 fiscal. Most of these banks said they had accounted for the under-disclosure in FY16 during FY17, before the RBI issued its directive in April.

Nonetheless, having emerging unscathed from the RBI’s asset quality review (AQR) in 2015, private banks falling victim to the RBI’s new directive — that requires banks to make suitable disclosures, in case of any material divergence — in banks’ asset classification and provisioning from central bank norms — has rattled investors and various market players.

Bad loans gallop

Over the past three quarters, private sector banks have been adding bad loans at a much faster pace than their public sector counterparts. Their gross non-performing assets have been growing (on a year-on-year basis) at a scorching 60-100 per cent. Private banks’ share in total bad loans has also inched up to 14 per cent as of March 2017 from around 10 per cent last year.

What has rattled investors in particular is the sudden rise in bad loans of private banks after public sector banks felt the heat of the RBI’s earlier clean-up exercise — the AQR. Private lenders such as Axis Bank and ICICI Bank, which have relatively higher corporate exposure, remained more or less unaffected by the AQR. It was only in the beginning of the 2016-17 fiscal that these banks created a watch-list — believed to be the key source of future stress. A chunk of the slippages in the last few quarters have come from the watch-list.

Not a true and fair view

The RBI’s April 18 circular on ‘Disclosure in the Notes to Accounts to the Financial Statements: Divergence in Asset Classification and Provisioning’ states that “there have been instances of material divergences in banks’ asset classification and provisioning from the RBI norms, thereby leading to the published financial statements not depicting a true and fair view of the financial position of the bank.”

Axis Bank stated that loans to the tune of ₹9,478 crore, according to the RBI, should have been declared as NPAs in the FY16 fiscal itself; the bank had reported gross NPAs of ₹6,087 crore as on March 2016. As per ICICI Bank management, the RBI assessed incremental bad loans to the tune of ₹5,100 crore as part of this exercise.

Yes Bank, in its annual report, showed GNPAs worth ₹748 crore in FY16. However, as per the RBI’s assessment, the bank’s bad loans were ₹4,925 crore — a divergence of ₹4,176 crore.

Stock price impact

The stock price movement of the underlying bank stocks has been mixed. While Axis Bank has lost a mere 2 per cent post its March quarter results, when it made disclosures regarding the divergence, ICICI Bank rallied nearly 16 per cent post its Q4 results.

Many believe the worst may be over for the two private banks, given the large additions to the bad loan book in FY17, and earnings should gradually improve over the next two to three years. The retail portfolio should, to some extent, offset the lacklustre performance in the banks’ corporate book. For ICICI Bank, its strong capital position lends additional comfort.

After falling over 10 per cent post its results, YES Bank appears to be slowly recouping some of its losses. Its strong core performance is a key positive. For the full 2016-17 fiscal, the bank reported a strong 35 per cent growth in loans. Also, as all the three banks stated that they have accounted for the divergences in FY17, provisioning for bad loans is not expected to spike, according to most analysts.

That said, investors still need to watch out for sudden rise in slippages in FY18. Given the poor credit offtake within the corporate sector and persisting uncertainty around the prospects of core sectors such as power and iron & steel, the profitability and asset quality performance of lenders may continue to remain under pressure. The many nasty surprises (due to shoddy lending practices, lax regulatory follow-up, governance issues or otherwise) reported by lenders over the past year are key concerns that could weigh on valuations in the near term.