RBI’s new loss provisioning regime seen triggering major fundraises by banks

Transition to the expected credit loss (ECL)-based regime for loan provisioning is expected to trigger billion-dollar fundraising by banks as they look to replenish capital buffers against the impact of higher provisioning requirements.

“Balance sheets of banks are extremely strong now compared to a year ago, and you will find many of them taking advantage of the improved valuations to go to market for fundraise,” said a senior banker.

Analysts are applauding the decision to introduce the framework at a time when the banking system’s health is robust, which in addition to minimising the impact of the norms, will also make it easier for banks to raise funds from the market to meet any potential shortfalls.

The sector could see a slew of billion dollar fundraises by banks in FY24, an investment banker said, adding “they (banks) were preparing for it starting mid-FY23”.

RBI, on Monday, issued a discussion paper proposing a shift in provisioning requirements of banks from an ‘incurred loss’ approach to the ECL approach. Most banks have been preparing for the transition to Ind-AS norms and ECL-based provisioning since they were introduced for NBFCs over two years back. For the past year, banks have also been tracking the implications of ECL provisions on profitability, balance sheet and capital adequacy — data that is being shared with the RBI.

RBI has said banks will be allowed to absorb the impact on common equity tier-I (CET-1) capital over up to five years. While it is currently not possible to assess the absolute impact of the proposed norms, analysts peg capital requirements could increase by 2-2.5 per cent for the banking sector.

“Last 5-10 years, PD (probability of default) would have been very high for the banking sector and that’s why eventual ECL provisions could be higher. Plus, ECL rules also include interest lost over the lifecycle of loan which compounds the problem,” Macquarie Capital Securities said in a note.

RBI has also said under the proposed structure, the regulatory floor is likely to be higher than the current incurred loss-based rules. This, combined with the fact that some provisioning requirements are harsher than IFRS9, could further exacerbate the impact, it added.

“The impact has been brought down if Ind-AS should be adopted. But yet, the need for capital and some disturbance it would cause to financials cannot be ruled out,” said a senior executive of a private bank.

While banks are comfortable on NPA provisions, much of the incremental provisions are seen arising from banks’ stressed loans classified as SMA-1 and SMA-2 buckets and the restructured loans portfolio, especially from sectors such as NBFCs and MSMEs which have been under stress for the last few years.

The transition is likely to make earnings volatile as banks absorb additional provisions and could also lead to increased subjectivity among banks, analysts said, adding that the impact is seen higher for PSU banks due to lower contingency provisions and capital adequacy, higher exposure to agriculture and MSME loans, and because their PD has been much high over the last several years.

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