Four Years In, Some Banks Continue To Under-Report Bad Loans

Four years after the Reserve Bank of India conducted an asset quality review to flush out bad loans not appropriately classified as non performing assets, the problem of under-reporting has not completely gone away.

At least eight banks have reported divergence in their assessment of gross NPAs versus that of the regulator. These lenders have also reported provision levels below the regulatory requirement.

According to disclosures made to stock exchanges, these eight banks have reported a cumulative divergence of Rs 9,363 crore in bad loan reporting. Of this, Rs 3,277 crore was at private sector lender Yes Bank Ltd. alone. The bank later clarified that most of the accounts found to be in divergence by the RBI were those which the bank had already identified as weak.

To be sure, the extent of divergence as a percentage of reported bad loans was low for most banks. Only Yes Bank reported a divergence of more than 15 percent of the originally reported bad loans.

The practice of disclosing divergence was introduced by the RBI in 2017. At the time the regulator said that divergence in bad loan reporting of more than 15 percent must be disclosed in the notes to accounts. On Nov. 1, the Securities and Exchange Board of India asked banks to disclose this asset quality divergence within 24 hours of receiving the notice from the RBI. The markets regulator termed divergences as material events/information, which demand immediate disclosures by the bank.

That diktat has prompted disclosures from nine banks so far. Since banks receive the RBI's inspection reports at different points in time, the list of banks that have reported divergences for financial year 2018-19 so far may not be complete.

Along with under-reporting of bad loans, these banks have also reported a divergence in the amount of provisions they chose to set aside compared to what the regulator deemed appropriate.

Cumulatively, provisions fell short by Rs 9,566 crore for the eight banks that reported divergences, an assessment by BloombergQuint showed.

Indian Overseas Bank reported the highest divergence in provisioning against bad loans at Rs 2,262 crore. Private sector lenders Yes Bank and Lakshmi Vilas Bank Ltd., in their disclosures to the stock exchanges said that in the period since March 2019, they had already started making some of these provisions and the effective impact on future quarterly numbers would be lower.

According to Dhananjay Sinha, head strategist and chief economist at IDFC Securities, the variation in what the RBI considers adequate provisioning and what the bank has made is a difference in judgment.

“To get a clearer understanding of whether a bank has made less provision than necessary, one must look at where the account was at the time of it being classified as NPA. Depending on the way the account was performing, the quality of collateral and ability of the bank to recover its loans, a banker may choose to make a certain amount of provisioning,” Sinha said.

Unless the gross NPA as assessed by the RBI is considerably larger than what the bank has disclosed, investors have understood that this difference in judgement will always exist, he added.

According to Asutosh Mishra, head of research at Ashika Stock Broking, one reason for public sector banks to make lower than expected provisions against bad loans could be the increased glare from tax authorities. Higher provisions would directly result in lowering profits, which could then result in lower tax outgo from the bank.

“In case of private banks where you saw aggressive provisioning against bad loans, there were higher deferred tax liabilities. Public sector banks tend to avoid such liabilities, because it brings too much attention from the authorities,” Mishra said.

To be sure, minimum applicable provisioning on a bad loan is determined by the RBI's income recognition and asset classification or IRAC norms. In the first year of an account becoming an NPA, banks must maintain 15 percent provision against. This is gradually raised to 100 percent if the account continues to be an NPA for four consecutive years.