Is the worst over for Indian banks?

Credit cost for banks is expected to remain high due to withdrawal of regulatory forbearance schemes by Reserve Bank of India (RBI). Most PSU banks are expected to report losses and some corporate focused private sector banks are expected to see sharp declines in profits. Higher slippages and provisions will be the main discussions during the March quarter earnings of banks. The accounting of frauds observed in banking and also lack of treasury gains will lead to further pressures during the quarter.

However, there have been certain recent relaxations, which have been offered by the RBI with respect to mark to market (MTM) provisions and provisions for National Company Law Tribunal (NCLT) accounts. MTM losses on investments have been allowed to be spread over a few quarters. There also is a relaxation to reduce provisions on accounts referred to NCLT from 50 per cent to 40 per cent. How will each of the banks use these relaxations, will also be keenly observed.

After taking a very severe stand on recognition of impaired assets, it is surprising that the RBI has taken a step back and given relaxation on the provision percentage. Most banks have a provision of close to 50 per cent on their NCLT referred cases. Using this forbearance for a quarter may not serve much of a purpose and the market may not be enthused if the quarterly results have reduction in provision percentages. In any case banks will have to provide based on haircuts to these NCLT accounts and the current estimates are in the range of 60 per cent, so eventually from current levels there is no expectations of any write backs on account of these accounts.

Over the last several quarters the markets have got it completely wrong in identifying whether the entire impaired assets have been adequately recognised as also whether the trend would reverse. There seem to be unknown unknowns, such as fraud, non-fund based exposures turning delinquent, which are rather impossible to estimate before they are discovered and shared with market. Banks may be carrying about 30 per cent PCR (provision coverage ratio) on gross stressed assets, which is highly inadequate. Hence, the return ratios are expected to remain depressed during FY19.