Credit rating agency ICRA on Thursday cautioned that with the risk-based supervision (RBS) audit for last year (FY17) yet to be completed for all banks by the Reserve Bank of India, the asset quality divergences and their consequent recognition could further weaken the reported asset quality of Indian banks.

The agency observed that based on the data disclosed by banks till date, the divergences in asset quality reported by Indian banks as on March 31, 2017, surpassed the divergences reported as on March 31, 2016.

During the Annual Financial Inspections (AFIs) of the banks, the RBI has come across divergence between the NPAs and provisions declared by the banks and those assessed during the AFI process.

As per ICRA’s estimates, the divergences in gross non-performing assets (GNPAs) as on March 31, 2017, stood at ₹54,100 crore for banks where RBS audit was completed by the RBI during the current year as compared with ₹43,500 crore for all the banks as on March 31, 2016.

“These asset quality woes could get compounded with the recent substitution of the existing framework for resolution of stressed assets with the revised framework issued by the RBI on February 12, 2018.

“This framework requires banks to implement a resolution plan (RP) on account of being classified as a special mention account (SMA), that is, repayments overdue even by a day,” said ICRA.

Anil Gupta, Sector Head – Financial Sector Ratings, said: “With the RBS audit for all banks likely to be completed by March 2018, the recognition of these divergences in their Q4 (January-March) FY18 financials could increase the reported sectoral GNPA levels.”

Further, though the revised framework is positive for the banking sector in the long term,the reported NPA is likely to deteriorate in the near term as SMA–2 (overdue by 61 days) itself accounting for 3.5 per cent of the advances for the sector.

Gupta observed that the reported NPAs can increase if the RP involves restructuring of loans or accounts getting referred to the National Company Law Tribunal (NCLT).

Upon recognition of the divergences, the fresh non-performing asset generation rate inched up to 5.8 per cent of the standard advances during Q3 (October-December) FY18 as compared with 3.8 per cent during Q2 (July-September) FY18, said the agency.

With the expectation of high slippages (annualised slippage of 6-7 per cent during Q4 FY18), ICRA estimates that the GNPAs for the sector can increase to ₹9.3 lakh crore by March 31, 2018, from ₹8.8 lakh crore as on December 31, 2017.