Indian Banking Sector Needs Rs. 89,000 Crore for New Ind-AS Accounting System

Indian Banking sector may require up to Rs 89,000 crore of capital towards incremental provisioning for advances while transiting to the new accounting system Ind-AS, says a report.

The provisioning required for migration to Ind-AS along with asset quality overhang and Basel III transition would surge capital consumption by banks especially PSBs.

“Of the Rs 89,000 crore, public sector banks would need Rs 63,100 crore, which is equivalent to an equity write-down of 1.10 per cent of the banks’ risk-weighted assets and 11.5 per cent of net worth at end-March 2017,” India Ratings and Research said in a note.

Private sector banks would also need a whopping Rs 25,800 crore but their higher capitalization would enable a smooth transition, it said.

The estimates are based on the assumption of a lifetime probability of default of 15 per cent and 100 per cent for stage 2 (currently special mention accounts SMA 2) and stage 3 (SMA 3 which includes NPAs plus standard restructured accounts) assets, respectively.

The rating agency expects a possible blended haircut of around 50 per cent across stressed assets. It assumes a loss given default (LGD) of 50 per cent for all assets across stage 2 and stage 3.

It said a significant increase in provisioning in the new regime may necessitate a reduction in risk weights in select asset categories to make a judicious balance between the existing and Ind-AS framework.

In October 2017, the government announced a direct recapitalization of Rs 1.53 trillion in PSBs.

Assuming Ind-AS is implemented from April 1 close to 41 per cent of announced recapitalization funds would be consumed towards incremental provisioning requirements, putting pressure on PSB’s ability to meet the regulatory core equity tier 1 capital under Basel III framework, according to the report.

“This could increase the pace of portfolio churn and credit market shift towards private sector banks, and partly towards wholesale non-banking finance companies,” it said.

PSBs’ loan growth increased to 8 per cent y-o-y as of end-September 2017.

“We believe PSBs’ capital consumption to remain high, given that profit and loss accounts (P&L) for most of banks (especially mid-sized PSBs) would remain under pressure due to the accelerated provisioning requirement on the accounts identified by the regulator for reference to the National Company Law Tribunal under the Insolvency and Bankruptcy Code in FY18, the report said.

The quantum of the government’s proposed capital injection in PSBs, together with the banks’ proposed mobilization of capital, should largely cover the provisioning shortfall for their stressed assets.

The capital can also support modest growth of around 7 per cent in advances.

Additional equity would be required if the credit demand were to pick up, though it does not form the base case scenario in view of the large idle capacity in the system, the report said.