Banks clean up much more than RBI asset quality review (AQR)
Our back of the envelope calculations (exhibit 1) suggest that the RBI’s AQR covered (including all three lists) ~3.5% of the system stressed loans. Contribution from restructured loans was significantly higher at ~2.2% (0.9% relapse and 1.3% loans requiring enhanced provisioning). New stress addition at the system level (from non-stress recognized standard loans) was lower at 1.3% of loans. RBI AQR contributed ~50% of the slippages for the quarter. Aggressive stress recognition outside the RBI AQR surprised us. Banks have utilized the opportunity to clean up aggressively and this is likely to continue in 4QFY16 as well.
RBI focus on balance sheet health – credit cost to remain elevated
Large part (50%+) of the NPA recognition in the RBI AQR happened via relapse from RL, wherein the account status classification into NPA happened from date of restructuring. Hence, most loans in this category moved to >2years NPA classification (D1/D2), leading to higher NPA provisioning. Total provisioning requirements on RBI AQR (including IRAC norms for ageing of NPA portfolio) would be INR400b-450b (90%+ expected to be with PSBs), of which half would hit P&L in FY16 and the rest in FY17 (exhibit 9). Significant pile-up of stress loans on the balance sheet would keep credit cost elevated, with limited support from core PPoP (higher non-interest bearing loans on balance sheet now). The RBI is also likely to come out with the guideline for increasing provisions on 5:25 and SDR accounts, which would further intensify pressure on credit cost.