RBI norms on NPLs to impact UBI, PNB
The key change is the Reserve Bank of India's recent notification banks are expected to follow in the case of non-performing loans is in 'floating provisions'.
By Mandar Nimkar, ET Bureau |
MUMBAI:The key change is the Reserve Bank of India's recent notification banks areexpected to follow in the case of non-performing loans is in 'floatingprovisions'.
"Most Indianbanks like HDFC Bank and State Bank of India have minimal floating provisions ontheir balance sheets. Other banks like Bank of India, Bank of Baroda have beenusing floating provisions as Tier 2 capital. However, banks like Punjab NationalBank, Union Bank of India, and ICICI Bank have been using these floatingprovisions to net-off against gross non performing loans. We believe these wouldbe most impacted," said a report of Merrill Lynch.
"We believe banks, goingforward, may not be allowed to net-off floating provisions from gross NPLs,while reporting net NPL's. Hence, it would raise the reported net NPL figure forbanks' having floating provisions. But the provisions still reside in thebalance sheet. But banks can use floating provisions as Tier 2 capital, up tocap of 1.25% of risk-weighted assets," the investment bank adds.
According to the report,ICICI Bank has been netting-off against gross NPLs, although post change innorms, impact is minimal. The biggest impact is on Union Bank and PNB as theywere deducting its floating provisions estimated at over Rs 5.1 billion and Rs10 billion, respectively. Hence, their reported net NPLs could rise by 2x and 4xfor PNB and Union Bank, respectively, although the percentage of loans risecould be only 50 bps and 70 bps, respectively, from reported 3QFY09 levels onlyon account of this accounting change.
Although the impact on bookvalue due to rise in net NPLs limited to 6-7% for Union Bank and PNB. However,Merrill Lynch strongly contends that this floating provisions does reside in thebalance sheet and hence, in its view, this does not materially change theunderlying quality of a banks' balance sheet as you cannot ignore provisionsmade by the bank.
"Thepositive takeaway is that it may shore up Tier II capital by 50-60bps of some ofthe government banks (especially those that have done restructuring). This,apart, from helping improve the overall capital position, may also ease somepressure on the funding costs (Tier II debt costs +9-10%), helping earnings,impact <1%," Merrill Lynch concluded.
"Most Indianbanks like HDFC Bank and State Bank of India have minimal floating provisions ontheir balance sheets. Other banks like Bank of India, Bank of Baroda have beenusing floating provisions as Tier 2 capital. However, banks like Punjab NationalBank, Union Bank of India, and ICICI Bank have been using these floatingprovisions to net-off against gross non performing loans. We believe these wouldbe most impacted," said a report of Merrill Lynch.
"We believe banks, goingforward, may not be allowed to net-off floating provisions from gross NPLs,while reporting net NPL's. Hence, it would raise the reported net NPL figure forbanks' having floating provisions. But the provisions still reside in thebalance sheet. But banks can use floating provisions as Tier 2 capital, up tocap of 1.25% of risk-weighted assets," the investment bank adds.
According to the report,ICICI Bank has been netting-off against gross NPLs, although post change innorms, impact is minimal. The biggest impact is on Union Bank and PNB as theywere deducting its floating provisions estimated at over Rs 5.1 billion and Rs10 billion, respectively. Hence, their reported net NPLs could rise by 2x and 4xfor PNB and Union Bank, respectively, although the percentage of loans risecould be only 50 bps and 70 bps, respectively, from reported 3QFY09 levels onlyon account of this accounting change.
Although the impact on bookvalue due to rise in net NPLs limited to 6-7% for Union Bank and PNB. However,Merrill Lynch strongly contends that this floating provisions does reside in thebalance sheet and hence, in its view, this does not materially change theunderlying quality of a banks' balance sheet as you cannot ignore provisionsmade by the bank.
"Thepositive takeaway is that it may shore up Tier II capital by 50-60bps of some ofthe government banks (especially those that have done restructuring). This,apart, from helping improve the overall capital position, may also ease somepressure on the funding costs (Tier II debt costs +9-10%), helping earnings,impact <1%," Merrill Lynch concluded.
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