New RBI norms on restructured loans positive for most banks: Moody’s

The Reserve Bank of India’s new guidelines on higher provisioning for restructured loans is credit positive for India’s banks, global credit rating agency Moody’s Investors Service has said.

The RBI had in end May issued new guidelines on restructuring advances by banks and financial institutions, which require banks to raise their provisions on restructured loans to 5 per cent from 2.75 per cent currently.

The higher provisioning is credit positive for India’s banks because it increases their loss-absorption buffers and incentivises them to enhance their underwriting standards to reduce credit costs, Moody’s said in a note to its research clients.

In Moody’s view, the authorities’ focus on provisioning guidelines for restructured loans reflects a more proactive management of the asset cycle.

Indian banks’ restructured loans have increased in the past two years and 15-25 per cent of restructured loans eventually slip into non-performing loan classification within 12 months of restructuring.

The RBI began applying the provisioning guidance on new restructured loans on June 1, but has opted to phase in implementation on existing restructured loans.

“We expect the new guidance to affect most public sector banks, particularly those with high levels of restructured loans”, Moody’s said. These banks include Indian Overseas Bank and Central Bank of India.

Private sector banks will be less affected.

“While we expect higher provisions to pressure banks’ profitability in coming quarters, we expect the banks’ strong loss-absorption powers and balance sheets to more than offset any pressure on profitability”

The RBI’s increased emphasis on restructured loans is also seen in the more stringent treatment of these loans in upcoming revisions to the loan classification system.

srivats.kr@thehindu.co.in

Source: thehindubusinessline