Indian banks could be staring at bad-debt provisions of an estimated Rs 30,000 crore against loans to Dewan Housing FinanceNSE -1.52 % Corp (DHFL), the Anil Ambani-led Reliance Home Finance, KKR-backed Coffee Day Enterprises and CG Power. Resolution hasn’t been finalised in any of these accounts, which means the December quarter could possibly see a reversal in the brief fall in provisioning that occurred in the preceding three-month period.
The bulk of the provisions will be on account of DHFL, which entered the bankruptcy process in December.
The Reserve Bank of India stipulates that once an account is referred to the National Company Law Tribunal (NCLT), a provision of 40% has to be made within the financial year. Provisions against nonperforming assets (NPAs) by the banking sector contracted about 11% to Rs 62,754 crore in the September quarter from Rs 70,458 crore in the year earlier.
State-run banks recorded a contraction of 15.6% in their provisions at the end of the September quarter.
While the financial system has an exposure of Rs 87,000 crore to the mortgage lender, most banks have only set aside 10-15% of their exposure. DHFL alone could pose a system-level provision burden of more than Rs 25,000 crore, which banks will have to absorb over the December and March quarters. Banks have an exposure of over Rs 5,000 crore to Reliance Home Finance, Rs 4,970 crore to Coffee Day Enterprises and more than Rs 4,000 crore to CG Power. Lenders are in the process of negotiating resolution plans in the latter three companies under the inter-creditor agreement (ICA) process.
“It’s discretionary upon banks to take the provisioning hit but considering that most lenders have worked towards a higher provision coverage ratio regime, the markets would expect them to set aside more against these stressed accounts,” said Yes Securities lead analyst Rajiv Mehta.
Another big account is Vodafone Idea Ltd where lenders will have to take a call on the safety net they want to create after the top management recently cautioned lenders that timely repayments may not be possible without urgent relief from the government if the telecom department decides to invoke bank guarantees to recover dues.
Lead lender State Bank of IndiaNSE -1.40 % has an exposure of Rs 12,000 crore to Vodafone Idea. The company has a total debt of Rs 1.17 lakh crore. It has also got a severe blow following a Supreme Court ruling on adjusted gross revenue in October.
SBI got Rs 12,160 crore following the acquisition of Essar Steel by an Arcelor Mittal-Nippon Steel consortium last month through the Insolvency and Bankruptcy Code (IBC) resolution process.
“Due to slow resolutions, the worry is that almost all the gain on the Essar account would be used to cover the provisioning loss in the December and March quarter,” said a senior bank official on condition of anonymity. “We were hoping that the tide has turned but the March quarter especially looks very crucial for the sector.”
A recent RBI financial stability report had said that the Indian banking system was not yet out of the woods and that there was a likelihood of bad loans increasing as a percentage of advances after the first annual decline in eight years.