Even as some banks assert about being resilient in the face of insolvency resolutions in 12 largest default accounts, foreign brokerage Morgan Stanley today said it sees banks' provisioning for those accounts doubling up from the current level.
The brokerage also warned that merging small and weaker PSBs with larger ones to help tide over their capital issues will be counterproductive for the acquiring banks. "We think provisioning on these loans is 30-40 per cent currently and could increase to around 60 per cent. This could imply 0.40-0.90 per cent increase in credit cost for the system," Morgan Stanley said in a note.
On merger plans, it warned that "government may look at merging small, weak banks with larger and relatively stronger banks. This is clearly a negative for the large state-run banks."
The note said based on media reports, these 12 accounts constitute for Rs 2-2.5 trillion or 2.5-3 per cent of system loans.
The brokerage particularly warned that the state-run banks, which hold 70 per cent market share, do not have the ability to take higher provisions and given government's tightness on funds, only the large ones could be able to access capital from the markets.
The note comes a day after country's third largest private sector lender Axis Bank came out with data specifying that it had adequately provisioned for these 12 accounts, and three days after the largest lender SBI asserted that its profitability will not be hit by the additional provisioning.
Axis said it has exposure to seven of these 12 accounts which include Essar Steel, Bhushan Steel, Bhushan Power, Lanco Infra, Amtek among others and seven of these 12 have already been sent to NCLT (National Company Law Tribunal) for possible liquidation.
According to reports, the RBI has asked banks to set aside as much as 50 per cent for these 12 accounts, which has raised concerns over bank profits. The note said apart from the 12 identified accounts, some media reports are pointing out to a list of another 55
stressed accounts given by the RBI to the lenders for resolution.
"We expect provisioning to increase significantly during FY18 and unlikely that it moves lower in FY19 given the long tail of stressed assets (some of which are still standard with just less than 1 per cent provisioning). We continue to see pressure on earnings at corporate banks, despite being significantly below consensus already," Morgan Stanley said.
The brokerage, however, welcomed the RBI action on provisioning, saying it will help clean up the books and also prepare better for migration to Ind-AS accounting which has to be adopted from next April.