Rating agency Moody's has said that increased provisioning for restructured loans is credit positive for Indian banks as it increases their loss-absorption buffers.
In a statement issued on Thursday, it said that higher provisioning is credit positive for India's banks because it increases their loss-absorption buffers and incentivises them to enhance their underwriting standards to reduce credit costs.
last week, the RBI had finalised guidelines that will require banks to raise their provisions on restructured loans to 5 per cent from 2.75 per cent currently.
The RBI began applying the provisioning guidance on new restructured loans on 1 June, but has opted to phase in implementation on existing restructured loans, with provisioning set at 3.50 per cent by March 31, 2014, 4.25 per cent by March 31, 2015 and 5 per cent by March 31, 2016.
“In our view, the authorities' focus on provisioning guidelines for restructured loans reflects a more proactive management of the asset cycle,” it said.
Indian banks' restructured loans have increased in the past two years, and 15-25 per cent of restructured loans eventually slip into non-performing loan (NPl) classification within 12 months of restructuring, it said.
The RBI's increased emphasis on restructured loans is also seen in the more stringent treatment of these loans in upcoming revisions to the loan classification system, the agency added.Specifically, it said starting April 2015, a standard performing loan would immediately be classified as substandard upon restructuring, and cannot revert back to standard status.