RBI’s new draft guidelines for restructured loans are likely to hit earnings of banks by at least 3-8 per cent over the next two years, while some public sector banks are expected to get most impacted, a report by Bank of America Merrill Lynch has said.

Reserve Bank last week issued revised draft policy norms for restructured loans, post the working group (WG) guidelines issued in July, 2012. According to the draft norms, banks would need to step up provisioning on restructured loans by 1 per cent from FY’14 to 3.75 per cent and to 5 per cent by FY’15 on the existing stock of restructured loans.

The norms, if implemented, would be applicable to new restructured accounts with effect from April 1, 2013 and in a phased manner for existing accounts.

Analysing the impact of the new norms, BoA-Merrill Lynch said that the state-owned banks, which have nearly 10 per cent of total loans in the restructured category, would be more impacted by this move than their private-sector peers.

“The impact on earnings may be somewhat less as some of these loans could get upgraded, we establish at least 3-8 per cent of earnings hit for the banks through FY’14-15,” it said.

Banks with higher provision cover, like Bank of Baroda and Union Bank, may have some cushion to offset the earnings hit, while private banks would be least impacted with impact estimated at less than 0.5 per cent, it added.

Restructured loan is a new loan that replaces the outstanding balance on an older loan, and is paid over a longer period, usually with a lower instalment amount.

Loans are commonly restructured to accommodate a borrower in financial difficulty and, thus, to avoid a default.

In the third quarter of the current fiscal ended December 31, 2012, Indian Bank had 10.9 per cent of its loans in restructured category, while the country’s second largest lender PNB had 9.6 per cent and OBC had 9.5 per cent.

However, country’s largest lender State Bank of India, which is also a public sector bank, had only 3.5 per cent restructured loans.

On the contrary, leading private sectors lenders ICICI, HDFC and Axis Bank had 1.5 per cent, 0.3 per cent and 2.4 per cent, respectively.

The report said these guidelines allow banks to upgrade a restructured loan to a ‘standard loan’ in their accounts if the loans have been performing for a specified period (12 months for the credit facility with longest moratorium).

These guidelines, especially relating to upgrading may “partly mitigate” the impact, as in some instances 30-40 per cent of reported restructured loans could be upgraded, it said, adding, they would act as a deterrent to “shallow” restructuring that tends to happen in the banking sector.

The RBI has invited feedback on the draft guidelines by February 28, 2013.

(This article was published on February 3, 2013)
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