Mumbai: Bankers are sweating over what is likely to be a tough time in the next fiscal year as the Reserve Bank of India (RBI) is expected to unleash stringent rules, tightening provisioning requirements for project finance, introducing a new expected credit loss (ECL) framework and imposing a higher liquidity coverage ratio (LCR) for deposits to hedge against sharp outflows through digital channels.
The central bank is expected to introduce these rules later this year and bankers are worried they will hurt profitability in the medium term.
“Banks have given their feedback on all three proposals; we can only hope RBI listens. The project finance norms, particularly, are pretty harsh. If implemented in its current form, it could hurt financing for the sector,” said an executive at a public sector bank. “At a time when India is looking to grow faster and there is no crisis on the horizon, these norms could do more harm than good.” The central bank published a set of draft guidelines in April on project finance.
In the draft guidelines, RBI asked all regulated entities to set aside 5% of their infrastructure loan amounts to cover against potential losses when a project is in the construction phase.
This buffer can be reduced to 2.5% when the project becomes operational, and further to 1% after it generates adequate cash flow to repay its existing obligations, and its long-term debt declines by at least 20% from the time of commencing commercial operations.
This substantially increases provisions from a flat 0.4% currently.
CREDIT LOSS
The new provisioning model proposed by RBI for expected credit loss says banks must recognise stress much earlier than now, in line with the Indian Accounting Standards currently followed by non-banking financial companies. Banks currently make a provision when a loan is marked as a non-performing asset; under the proposed model, this will have to be done much earlier.
Bankers said moving towards an ECL framework was expected, but doing it along with increasing provisions for project finance and forcing banks to keep aside more deposits could impede credit growth in the immediate future.
“These norms will definitely dent credit growth and, by extension, hurt economic growth and job creation. By asking banks to keep aside more deposits for digital banking, RBI is essentially discouraging digitisation, which is totally against what they are preaching,” said a second public sector bank executive. “If banks tax digital payments, it will increase cash circulation and promote a black economy, which I do not think is the intention.”
LIQUIDITY COVERAGE RATIO
In its monetary policy review in April, RBI said it will modify the LCR framework for lenders to account for quick withdrawal of deposits due to the availability of instant digital payment modes.
Banks are currently required to maintain a stock of high-quality liquid assets to cover the expected net cash outflows in the next 30 calendar days. These assets are primarily made up of government securities, which can be easily liquidated to meet banks’ cash requirements.
LCR currently stands at 136% for banks, much above the minimum required 100%. Bankers said imposing a further charge for digital outflows does not make sense. “It is unwarranted because banking liquidity is pretty sound. Does RBI want banks to reduce their deposit growth at a time when there is a need for more funds?” asked a private sector bank executive.
IN GOOD HEALTH
Analysts, however, said there is probably no better time to tighten the screws and cover for emerging risks.
“Overall, banking sector health is robust, if we look at the cushion in capital adequacy, net NPAs (non-performing assets), provisioning cover or profitability,” said Ajit Velonie, senior director, Crisil Ratings. “Hence, from the regulator’s point of view, this is the best time to implement norms which help in structurally strengthening the sector, as banks are better placed to manage any interim transitional impact.”
Even after implementation of LCR guidelines, the median LCR of banks would only drop to 117%.
Similarly, Velonie expects the final project finance guidelines to be nuanced, to balance building of adequate buffers for banks while also facilitating credit flow to projects.
