RBI clears fog on special provisioning

MUMBAI: The Reserve Bank of India (RBI) has cleared the fog on ‘special provisioning’ of loans which are under moratorium — a clarification that has come as a relief to many banks.

In a recent conversation with bank CEOs, senior regulatory officials have spelt out that provisioning should be considered only for loans where principal or interest payments are overdue between 61 and 90 days as on March 1, 2020. Such loans are categorised as SMA2 — or, special mention accounts (SMA) -2.

“Several banks were under the impression that all SMA accounts as on 1st March would have to be provided for. This would have significantly consumed banks’ capital and lowered their ability to give fresh loans,” a senior banker told ET.

An SMA2 loan which has been given moratorium and is not serviced by the borrower becomes an NPA by March 30. Such a loan will attract a total provisioning of 10% — of which 5% will be as of March-end and another 5% at the close of the June quarter.

SMA loans — divided into three baskets (0, 1 and 2) — is a classification brought in by the RBI five years ago to detect early signs of stress among bank borrowers and monitor accounts which run the risk of turning into bad loans or non-performing assets (NPAs).

According to an analyst’s estimate, total SMA loans were around ₹3.2 lakh crore in end September 2019 — of which, SMA0 was ₹1.45 lakh crore, SMA1 ₹0.84 lakh crore, and SMA2 ₹0.96 lakh crore. (SMA1 are loans where interest or principal is overdue between 31 and 60 days; while SMA0 are loans where principal and interest are overdue for less than 31 days or showing initial signs of stress). While the total SMA number had been a little over ₹3 lakh crore since January 2019, it is believed to have gone up by end February 2020, by when the spread of Covid-19 was beginning to hurt an already slowing economy.

“It’s good that RBI has clarified. Some of the auditors were insisting that the provisioning should cover the entire SMA book. Banks will get a regulatory benefit of 5% during the quarters...,” said another banker.

The normal provisioning of NPA is 15% for secured loans and 25% of unsecured loans. This means if a ₹100-crore loan becomes an NPA or sub-standard, at least ₹15 crore has to set aside by the bank from its earnings as provision — a prudential asset classification and accounting rule which shrinks the bottomline as well as lowers the capital adequacy of the lender.

In the course of the meeting, some of the bank chiefs suggested that the regulator should extend the period of moratorium (or deferment on servicing of interest or repayment of loan) by another three months. The current moratorium period ends on May 31. “Given the partial lockdown, RBI may decide to extend the moratorium. This could coincide with some measures from the government in the next one week towards small and medium businesses,” said an industry source.

“At the meeting, RBI also said that it was up to the banks to decide whether they would grant moratorium to NBFCs which have borrowed from banks,” said a banker. The regulator, which for weeks has been silent on the NBFC issue, may have been forced to express its views following the Supreme Court directing the RBI to ensure implementation of its March 27 circular in its letter and spirit.