Swachh Banks Mission 2.0

There’s a sense of unease after YES Bank declared its March quarter results on Wednesday. After emerging unscathed from the RBI’s asset quality review (AQR) in 2015, the bank has become a casualty of the RBI’s new directive that requires banks to make suitable disclosures in case of material divergences in asset classification and provisioning from the RBI norms. The sharp increase in bad loans for YES Bank as a result of this divergence pertains to one account which should have been declared an NPA in the previous fiscal itself.

The episode raises several questions on the RBI’s massive clean-up activity thus far.

When the RBI first embarked on its AQR exercise, it was believed to be just a prudent exercise where banks were asked to make additional provisioning for loans, even if they were not delinquent. But what unfolded subsequently did not seem a run-of-the-mill cautionary measure. In the two quarters following the AQR in December 2015, quarterly slippages mounted to about ₹1-1.5 lakh crore. This only brought to light the blatant attempt by banks to sweep the mess under the carpet. The fact that a chunk of the slippages were from restructured accounts only reinforced the belief that the AQR was in fact done to flush out the rot in banks’ books.

While PSBs took it on the chin, private lenders such as Axis and ICICI Bank that also have relatively higher corporate exposure remained more or less unaffected. It was only in the beginning of Fiscal 2016-17 that these banks created a watchlist — believed to be the key source of future stress. Dutifully, the chunk of the slippages in the last few quarters have come from the watchlist.

Did these banks attempt to mimic the AQR exercise while drawing up their watchlist or was it independent of the NPAs declared by the PSBs? Difficult to say. But given that most of the watchlist accounts pertain to sectors such as power, iron and steel, mining, cement and textiles — key source of stress for PSB as well — the nature of slippages could not have been much different. Also, most of these are legacy accounts created between 2009 and 2012, when corporates were aggressively lining up fresh capacities.

So, given the sheer quantum of bad loans declared over the past several quarters under AQR or otherwise (over ₹3.5 lakh crore), the RBI’s latest directive begs the question: What sparked off yet another Swachh Banks Mission?

That the RBI is going over banks’ accounts with a fine-tooth comb once again can only mean that it may have found gaps in its earlier AQR exercise and is trying to plug them. Would it be too much to expect banks to be more forthcoming?

The central bank’s recent circular on ‘Disclosure in the Notes to Accounts to the Financial Statements – Divergence in Asset Classification and Provisioning’, aside from being a mouthful, does not appear any different from AQR. Yes, the directive is more ‘in the face’ when it states that there have been instances of material divergences in banks’ asset classification and provisioning from the RBI norms, thereby leading to the published financial statements not depicting a true and fair view of the financial position of the bank.

The RBI has also laid down specific conditions when disclosures have to be made — the mandated provisioning by the RBI exceeds 15 per cent of published profit after tax for the period under question or additional gross NPA identified by the RBI exceeds 15 per cent of the published figure. But from an investor or layman standpoint, both AQR and the new directive, end with the same outcome — sharp rise in the stockpile of bad loans without them being any the wiser.

There are still multiple theories doing the rounds on AQR and the rationale for picking certain accounts to be declared as NPAs — from sector-specific stress to bringing uniformity in asset classification across banks. While the new directive flags concerns on material divergences, it is still unclear whether these are sector- or company-specific issues. Worse, if these are bank-related lapses, then the respective managements need to be more open in the interests of depositors and investors.

In the case of YES Bank, for instance, the management stated that one account in the cement sector has been declared an NPA as per the RBI’s directive and it is confident of recovery in the near term as a related M&A is completed. While this gives a hint of the problem it is still not enough to complete the picture. With many more banks due to declare their results in the coming weeks, the repercussions of the RBI’s circular will be interesting to watch.

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