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RBI's Feb 12 circular to help accelerate the NPA process, says Credit Suisse’s Ashish Gupta

The February 12 circular from RBI will accelerate the NPA process and will lead to a faster recognition of pain in the books, said Ashish Gupta of Credit Suisse.
He said the circular was much needed because the banking regulator felt the pressure of stress on balancesheets and the resolution process was not moving at the desired pace. According to him, RBI could have also felt that the decision making under Insolvency and Bankruptcy Code (IBC) was superior to some of the decision making taking place in the Joint Lenders' Forum (JLF) and hence the circular.
The RBI has also provided a window to work on resolution plans of these assets, said Gupta.
With resolution of the accounts under NCLT, some of the NPAs could move out, while others would come in due to RBI’s new guidelines.
When asked if they would look at investing in the companies that have been granted new bank licenses, he said the performances of those being granted this license has been a mixed bag. So investors should look at those small finance banks which have a better deposit franchise.
With regards to NBFCs, he said there are two broader trends that are in their favour. One is pick-up in loan demand. Secondly, the pressure on net interest margins of NBFCs may not be as sharp as it was earlier.
Below is the transcript of the interview.
Q: What do you make of the Reserve Bank of India's (RBIs) February 12 circular on the new NPA norms?
A: The circular actually accelerated the process of NPA recognition. We have now known for some time that the impaired assets of Indian banks are much higher than the reported NPA numbers. As per our estimates the impaired assets are closer to 16 percent of loans compared to last reported NPA numbers which are closer to 10 percent of loans. This incremental 4-5 percent of loans, most of which is actually sitting either in the restructured bucket or SDR or S4A, post this recent circular of RBI it will get recognized as NPA more quickly. A large amount of it actually might precipitate on bank balance sheet as early as next couple of quarters.
Q: 10 percent to 16 percent is a large increase. NPAs can rise by 60 percent you think?
A: All of it won't immediately move to NPAs. Also RBI has still provided window for banks to work on resolution plans of these assets. Additionally another important consideration we have to keep in mind is the first list of RBI, the first 12 cases, their 270 day period ends around April. So, you should expect to see resolution of those assets and hopefully those assets or the large share of those assets which are 3-4 percent of loans for some of the banks will start moving out of the NPA bucket. So, there will be inflow from this 5 percent of loans and there will be some outflow on account of some of the earlier NCLT cases getting resolved.
Q: How would you describe this circular itself - unavoidable, admirable, last of the bad news?
A: I think it is much needed because as a regulator RBI was clearly feeling the pressure that now with over four years or five years of some of these forbearances had been in place, it had not helped the resolution process. Given whatever feedback one is receiving from the first stage of NCLT cases, the resolution process has been much better. The same banks, if you see the steel cases as well, they have been willing to take haircuts varying between 30 percent to as high as 70-75 percent.
So, the regulator clearly felt that the decision making under the IBC code was superior to some of the decision making that was happening in the JLF Forums. This is perhaps the reason they decided to accelerate and move forward with this circular.
Q: We have had a lot of small finance banks getting listed, one of them is IPO underway and will get listed. Is that a space you would look for buys at all, the small guys, the AU, Bandhan and Equitas, that variety?
A: Without naming specific banks, what I would like to highlight is that it's been nearly 3 years since RBI started granting couple of new bank licences and some of the small bank licences and we have seen 6 companies converting to banks, there have been micro-finance companies, infrastructure lenders, some NBFCs converting to banks. The success of all this has been a mixed bag. Some of these guys have very successfully transformed into a bank by broad basing both asset as well as the liabilities side of the balance sheet. Some of them have not been as successful both on the loan book side as well as broad basing the funding profile. I think within this lot if we ignore the valuations for the moment, investors should look for banks that have been able to build a good deposit franchise as a bank and secondly on the loan side those that have been able to get into higher yield loan segments.
Q: NBFCs - now that rates have risen, yields have risen at least, is there anything in that space you like, anything which can take advantage of that big report you wrote of Fintech, how many of them look like good candidates for a Fintech revolution?
A: Without taking names, I would kind of highlight two broad structural trends that are still favouring NBFCs, one is that loan demand in India is picking up, clearly the aggregate banking sector is not in a financial position to be able to cater to all this loan demand. So, there will be enough demand of credit for NBFCs to be able to grow at a good pace. Historically though whenever we have had rising rates, NBFCs as a stock have not done well but there is a large difference now, banks have moved to MCLR regime and what that means is that bank lending rates start moving up even as incremental deposit rates start moving up. If you see some of the largest banks just in the past month they have raised MCLR by 20 basis points and that provides NBFCs with much better pricing power so early in the cycle compared to historically. So, this time around the pressure on NBFC margins may not be as sharp as earlier cycles.

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