IBC: Banks to set aside Rs 18,000 cr in FY18, expect 25 per cent profit

Mumbai: Resolution of the 12 large, RBI-identified dud assets under provisions of bankruptcy code will require Rs 18,000-crore additional minimum provisioning and impact banks' profitability by 25 per cent in FY18, India Ratings said today.

"Indian banks need to provide a bare minimum Rs 18,000 crore additionally towards the 12 accounts identified by the Reserve Bank of India (RBI) for reference to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC) in FY18," the domestic rating firm said.

The report comes a day after the Gujarat High Court allowed banks to go ahead with the move, after Essar Steel, one of the dozen accounts, challenged the RBI directive.

The report said at present, the weighted average provisioning for the 12 accounts from the iron and steel, infrastructure and textiles sectors, stands at 42 per cent as against the RBI mandate of 50 per cent to be achieved through the fiscal.

The iron and steel sector will require Rs 10,500 crore of extra provisions and Rs 4,100 crore for the infra sector. The extra provisioning, which directly impacts the bottomlines, will eat into banks profits by around 25 per cent in FY18, the report said, adding the impact on return on assets will be 0.12 per cent in FY18.

A few mid-size state-run banks will experience an "disproportionate pressure on the profit and loss accounts" and hence outlook towards them is negative, the rating outfit said, noting the profitability of large banks will be "stretched" leading to pressure on their standalone ratings.

"We continue to maintain there is an increasing divide between the large and smaller PSBs, with the former having some access to growth capital, better market valuation, and also some non-core assets to divest while the latter would only receive bailout capital if required and would need to ration their capital consumption over next two years."

It can be noted that there have been concerns on banks' profitability since the RBI came out with the 12 account names and asked banks to resolve it by end of the year under the provisions on the IBC.

The country's largest lender SBI had conceded that it will require more provisions but ruled out big impact on profits, while third largest private lender Axis Bank had said it has adequate provisions against its exposures to these accounts.

On a sectoral basis, the rating agency said the weighted average provisioning in the iron and steel sector is highest at 45 per cent because of the deeply entrenched stress, low capacity utilisation and high expected ultimate haircuts. For infrastructure sector accounts, the average provisions are at 36 per cent.

"The fear of insolvency will force all stakeholders to seek remedial measures and resolve stress swiftly, which will be positive, in the event it occurs. The fear of liquidation or winding up could have a positive impact as stakeholders would be willing to arrive at common ground to escape liquidation, nevertheless haircuts specially towards the larger exposures are inevitable," the agency said.

In an earlier report, India Ratings had said the impaired assets in the system will peak at 13 per cent by FY19, while the credit costs will come down to 1.85 per cent as against 2.30 per cent in FY16. It expects banks to require Rs 91,000 crore in tier-I capital till March 2019 to grow at 8-9 per cent per annum and Rs 20,000 crore of it will come from the government.