SC verdict on RBI circular may trigger downgrades for PSBs

Public sector banks could see downgrades after Tuesday’s Supreme Court verdict that set aside the central bank circular on insolvency proceedings, likely giving a fresh lease of life to the erstwhile practice of negotiated debt-restructuring deals between companies and bankers.

Analysts expecting better statistics from state-run lenders in the March and June quarter will now have to change their estimates as the verdict may further delay the resolution of stressed assets, particularly in industries such as power and sugar.

“Corporate-heavy banks could see earnings downgrades for the current quarter as analysts will have to increase provisioning estimates,” said Ashutosh Mishra, head of institutional research, Ashika Stock Broking. “Analysts were expecting good numbers in the March and June quarters as NPA formation has slowed significantly across sectors and recoveries from recent NPAs are streaming in.”


Analysts estimate banks’ stressed power assets at $36 billion. Of this, banks have provided for at about 50 per cent. They estimate that auctioning these power sector non-performing loans (NPLs) will need a haircut of 75 per cent, or about $9 billion.

If banks are allowed to roll-back NPL classifications, it would be regressive and bank balance sheets would become opaque again, said analysts.

Investors will, however, continue to look at book values adjusted for haircuts on stressed accounts. “The judgement seems to be negative for corporate-heavy PSU and private banks from a credit discipline standpoint and from the RBI’s perspective as it undermines the RBI’s action,” said Cyrus Dadabhoy, analyst, Centrum Broking. “There would be some earnings downgrades for banks, especially those in the public sector…”

Analysts estimate State Bank of India’s earnings per share (EPS) at Rs 27.92 for FY20, while Bank of Baroda and Bank of India are expected to report EPS of Rs 17.13 and Rs 16.47, respectively, this financial year.

The public sector bank group made Rs 85,400-crore in losses in FY18. Six of 21 public sector banks have seen the severest stress, with a fifth of their loan portfolio turning bad. Twelve of them made losses in the third quarter. The successive quarterly losses weakened their capital base and pulled down the capacity to lend.

After the Supreme Court ruling, banks have a lot of flexibility and time to stitch together solutions for each project — individually and outside of the Insolvency and Bankruptcy Code.

As per RBI’s filings to the Supreme Court, out of the 157 companies affected by the circular, not even one case has been resolved so far. So, it remains to be seen how effectively banks utilise this additional flexibility.

According to M B Mahesh, analyst at Kotak Institutional Equities, banks could probably slow down referring cases to the National Company Law Tribunal (NCLT).

“This would result in a slower pace of gross NPL reduction than before,” Mahesh said. “There would probably be a preference toward one-time settlements, or waits for bettertimed exits,” Mahesh said.