New RBI guidelines to increase Net NPA, but no economic impact - Edelweiss

The Reserve Bank of India (RBI) has issued a new set of guidelines on various loan provisions. Overall, these guidelines are unlikely to have any significant impact on our estimates. While there is no economic impact, net NPA ratios of some banks are likely to increase 50-100bps and tier-II capital ratios will go up by 60-80 bps.

Key highlights of new RBI guidelines

As per the new guidelines, floating provisions cannot be netted from gross NPAs to arrive at net NPAs. Until recently, some banks were using floating provisions as part of their provision coverage, which kept their reported net NPA ratios low. Now, when these floating provisions will cease to be a part of the provision coverage, reported net NPA ratios of these banks will rise; also, provision coverage will come down without any change in gross NPA numbers.

We are puzzled by the timing and nature of these guidelines as it penalizes the banks which have strengthened the balance sheet in the past by creating these floating provisions. However on the positive side, this will give much clearer picture of specific provisioning policies of each bank.

The reported net NPA ratio will increase 70-100bps for Punjab National Bank (PNB), Federal Bank and Union Bank. As these banks had net NPA ratio of less than 0.5% as of December 2008, an increase in net NPA/fall in provision coverage could have some sentimental negative impact. Private banks and State Bank of India (SBI) are unlikely to be materially impacted as they do not have floating provisions.

We would expect the affected banks to seek one-time approval to create specific provisions by using existing floating provisions.

Our view –No Economic impact

We believe that the increase in net NPA of a bank is negated by the existing understatement of core book of the bank, thus implying zero impact on the adjusted book value.

Source : Equity Bulls

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