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ICRA releases report on RBI’s guidelines on Scheme for Sustainable Structuring of Stressed Assets

ICRA releases report on RBI’s guidelines on Scheme for Sustainable Structuring of Stressed Assets

No immediate relief however reported Gross NPA % could come down after a period of 1 year as satisfactory performance of sustainable debt portion is established.

 

ICRA released report on RBI’s recent guidelines (issued on 13th June 2016) on “Scheme for Sustainable Structuring of Stressed Assets”. 

Key Points:

Implementation of the guidelines would help to bridge the gap between the actual expected losses and provisioning cover, therefore it would be a credit positive. These may also help the reducing the reported Gross NPA% by 30-100 bps (from current level of 7.7% as on March 2016) after a lag of one year (following satisfactory performance of sustainable debt portion), in ICRA’s estimate.

No immediate relief however reported Gross NPA % could come down after a period of 1 year as satisfactory performance of sustainable debt portion is established. In ICRA’s estimate banks Gross NPA % could come down by 30-100 bps from the current level of 7.7% as on March 2016.

As for provisioning requirement, while there would be no immediate relief to banks,  the norms are likely to reduce incremental provisioning requirement[1] over next 1-5 years  substantially (as chart 2 brings out) provided sustainable portion of debt is serviced satisfactorily and there is no further decline in fair value of non-sustainable portion.

Provisioning requirement gets more aligned with losses expected on stressed accounts rather than extent of overdues / nature of advances (secured / unsecured), a move towards expected credit loss framework (Ind AS 109). This could augur well for transparency. As for provisioning requirement, banks are likely to benefit when scheme is implemented in existing NPA accounts and likely to create higher provisioning (in near term) when scheme is implemented on standard (including standard restructured accounts).

Banks with higher provision cover on stressed accounts (stressed borrower specific provisioning) are likely to benefit more.

This could also ease funding availability to these borrowers and consequently enhancing their ability to recover when stress in underlying sectors reduces.

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