Banks may require Rs 89,000 crore for provisions during shift to Ind-AS: Ind-Ra

25 Jan 2018 Evaluate

The India Ratings and Research (Ind-Ra), a subsidiary of Fitch Ratings, has said that during shift to the new accounting system Indian Accounting Standards (Ind-AS), banking sector may require up to Rs 89,000 crore of capital towards incremental provisioning for advances. The provisioning required for migration to Ind-AS along with asset quality overhang and Basel III transition would surge capital consumption by banks especially public sector banks (PSBs). In October 2017, the government announced a direct recapitalisation of Rs 1.53 trillion in PSBs.

Ind-Ra noted that out of the total Rs 89,000 crore, PSBs would need Rs 63,100 crore, which is equivalent to an equity write-down of 1.10% of the banks’ risk weighted assets and 11.5% of net worth at end-March 2017, while private sector banks would also need a whopping Rs 25,800 crore but their higher capitalisation would enable a smooth transition. As per the report, the estimates are based on assumption of a lifetime probability of default of 15% and 100% for stage 2 (currently special mention accounts SMA 2) and stage 3 (SMA 3 which includes NPAs plus standard restructured accounts) assets, respectively. It expects a possible blended haircut of around 50% across stressed assets and it assumes a loss given default (LGD) of 50% for all assets across stage 2 and stage 3.

The rating agency has said that a significant increase in provisioning in the new regime may necessitate reduction in risk weights in select asset categories to make a judicious balance between the existing and Ind-AS framework. According to the report, assuming Ind-AS is implemented from April 1 close to 41% of announced recapitalisation funds would be consumed towards incremental provisioning requirements, putting pressure on PSBs’ ability to meet the regulatory core equity tier 1 capital under Basel III framework. This could increase the pace of portfolio churn and credit market shift towards private sector banks, and partly towards wholesale non-banking finance companies.

Ind-Ra further said that they believe PSBs’ capital consumption to remain high, given that profit and loss accounts (P&L) for most of banks (especially mid-sized PSBs) would remain under pressure due to the accelerated provisioning requirement on the accounts identified by the regulator for reference to the National Company Law Tribunal under the Insolvency and Bankruptcy Code in FY18. The quantum of the government’s proposed capital injection in PSBs, together with the banks’ proposed mobilisation of capital, should largely cover the provisioning shortfall for their stressed assets.

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