Indian banks need to provide a bare minimum of Rs 18,000 crore additionally towards 12 big-ticket bad accounts identified for insolvency resolution, says India Ratings and Research (Ind-Ra).
In June 2017, the Reserve Bank of India (RBI) had asked lenders to refer 12 identified accounts to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code.
The ratings agency estimated the current average provisioning towards these accounts at 42 per cent. The extra provisioning needed would reduce the profits of creditor banks by 25 per cent and reduce the return on assets by 12 basis points in the current financial year.
Banks with average provisioning of 50 per cent on the 12 identified accounts may also need to provide additional funds to reach the new minimum required provisioning, which stands at 50 per cent towards each of the accounts. Some of the large bad loans being referred for insolvency include Essar Steel, Bhushan Steel, Alok Industries, Lanco Infratech, and Amtech Auto.
Ind-Ra's outlook towards medium-sized public sector banks (PSBs) is negative due to chances of the additional provision burden adding disproportionate pressure on their profit and loss accounts (P&Ls). The additional provision requirement may also stretch the profitability of a few large PSBs in FY18, stressing their standalone ratings.
Ind-Ra continues to highlight the increasing divide between large and smaller PSBs. The large PSBs have some access to growth capital, better market valuation, and also some non-core assets to divest, while smaller PSBs would only receive bailout capital if required. Thus, smaller PSBs would need to ration their capital consumption over the next two years.
Out of the total Rs 18,000 crore provisioning required, the stressed iron and steel sector contributes around Rs 10,500 crore and the infrastructure sector Rs 4,100 crore.
The weighted average provisioning towards the iron and steel sector exposure continues to be the highest across all sectors at 45 per cent as on March 2017. Provisioning towards infrastructure sector exposure stands at 36 per cent.
Ind-Ra highlights that much of the unrecognised stress forms a part of the infrastructure sector. The unorganised sector exposure stands at Rs 7,70,000 crore as of September 2016, 35 per cent of which is expected to slip into the sub-standard category over the next 12-18 months.