The Reserve Bank of India directive asking banks to make 10 percent provisioning for all moratorium loans will save at least 35,000 rupees on their profitability in fiscal years 2019-20 and 2020-21, according to a report. On Friday, the central bank announced in its second series of liquidity-enhancing measures Rs 1 lakh crore specifically targeting fund infusion to small and medium shadow banks, home financiers and microcredit providers, who will ultimately go a long way in providing support to small and medium-sized enterprises
“While the liquidity boosters will help the small moneylenders, the RBI has also ordered banks to set a 10 percent provision for all loans that have matured but not yet NPAs (non-performing assets) in effect during the moratorium during March and June quarters. This will impact their profitability with Rs 35,000 crore in the March and June quarters, “Brickwork Ratings said in a weekend note.
The new provisioning requirement is to be set for the March and June 2020 quarters and this will affect their profitability in 2019-20 and 2020-21. The agency said its assessment is based on the assumption that system-level banks have the ability to manage asset quality in the short term after the moratorium remains a critically verifiable concern, even though they could manage provisioning resources by adjusting to the provision for slippages to NPAs in the financial year 2020-21.
Banks will have to categorize moratorium loans as special disclosure accounts (SMA) in which loans fall within 0-90 days of arrears. “According to our estimates, the provision on additional provision of 10 percent could increase the total provision in the quarters of March and June by Rs 35,000 crore. This assumes that SMA accounts account for approximately 4 percent of total system-level advances and are in moratorium.
“Such a big hit on profitability will also affect the capital positions of banks, especially state-run banks, many of which continue to report losses for nine months to December 2019. They may also need additional capital added, “said the service.
After pumping nearly 3.2 percent of GDP worth of liquidity into the system since February 6 monetary policy to help the economy fight the COVID-19 pandemic disruption, the RBI announced another Rs 1 last Friday lakh crore to boost liquidity, specifically for NBFCs, housing finance companies (HFCs) and MFIs, which will ultimately help analysts and shadow bankers help small businesses the most.
The last measure came because two of the most innovative liquidity measures worth Rs 2 lakh crore since February 6 did not produce the desired effect. On Friday, in the second booster dose of COVID-19, the RBI announced a new targeted long-term repo operation (TLTRO), under which it will pump Rs 50,000 crore into the system, and forced banks to invest 50 cents per investment of the money in debt with a lower rating issued by small and medium NBFCs, HFCs and MFIs.
Aside from the new TLTRO window, the RBI has also opened another Rs 50,000 crore in refinance window for NABARD, SIDBI and the National Housing Bank by lowering the reverse repo by 25 basis points to 3.75 percent.