What was to be a catastrophic quarter for banks could well turn out to be a comforting one, thanks to the dispensations that the RBI has ungrudgingly handed out for the fourth quarter of fiscal 2018. After allowing banks to stagger the recognition of large mark-to-market losses on their bond portfolios, the RBI relaxed certain provisioning norms for the March quarter. For the large accounts under IBC that essentially cover nearly half of the bad loans in the system, provisioning has been brought down from 50 per cent to 40 per cent for the March quarter. Given that most banks have already made provisioning (50 per cent or over) on the first list of cases referred by the RBI, the dispensation could imply nearly ₹20,000 crore of write-back of provisioning in the March quarter.
There have, no doubt, been logical motives for the RBI’s largesse. The RBI’s revised framework on resolving stressed accounts, released in February, had done away with the old restructuring schemes — CDR, SDR, S4A or 5/25. The accelerated NPA recognition would imply over ₹25,000 crore of additional provisioning for banks. The RBI’s leeway on MTM losses and provisioning cushion the blow somewhat — with a possible write-back of ₹28,000-30,000 crore in the March quarter. But it is not as if the RBI was unaware of the impact its February directive would have on banks’ earnings. It also justifiably had compelling reasons for its tough move. Restructuring schemes, such as SDR and S4A, only turned out to be ticking time bombs. Large slippages from these accounts, reported by banks in recent quarters, had led the RBI to junk all the schemes. The central bank has also been pulling up banks for the large bad loan divergences reported by them in recent quarters. Hence, by stepping in at the eleventh hour and rescuing banks from their botched treasury decisions and sloppy attempts to brush the mess under the carpet under the guise of various restructuring schemes, the RBI has undone the impact of its regulatory tightening. Such flip flops do little to re-build the eroded confidence of investors and depositors in the banking system.
Dispensation or not, banks are bound to see a steep rise in provisioning in the current fiscal, as nearly ₹2-lakh crore worth of loans, currently enjoying benevolent provisioning, start attracting provisions as per the NPA norms. Eventually, it is the actual recovery on these accounts which will matter. While a few large steel accounts are seeing good recovery, finding buyers for some of the other accounts referred to the IBC is proving to be a challenge, potentially leading to steep haircuts on such accounts. The bad loan mess which has been the result of years of shoddy lending practices, will have to run its course. Rather than playing white knight, the RBI needs to send a strong message that its recent dispensation is not an assurance of future bailouts and focus on strengthening the supervisory framework and containing operational risks in banks’ functioning.