With Nirav Modi, rising yields and NPAs, banks to face triple loss

The banks have been hit thrice thereby affecting the balance sheets of their lenders this quarter. The most obvious loss was during the fraud of Nirav Modi when the bank waited for 90 days for the repayment to be made before classifying the loan as a non-performing asset. The total exposure of the lenders took place via the loans against the letters of undertaking or credit limit over Rs. 20,000 Crore in the Modi Choksi scam. The second hit was due to the rise in the bond yields. Around 18 public sector banks had lost out on Rs. 11,100 Crore due to a decline in the value of their brand portfolio. Their overall treasury losses were at Rs. 5,600 Crore.

With the bond yields increasing up to 40 bps in the fourth quarter, the losses on the portfolio were expected to be more than Rs. 12,000 Crore. The third and the biggest scam was in the provision towards the NPAs. Banks had entered into the fourth quarter with a lot of optimism stating that most of the NPA woes were behind them and that huge recoveries were likely to take place when the multi-dollar companies or defaulters were sold under the Insolvency and Bankruptcy code. Lenders were positive that few out of their 12 accounts which they had referred to the IBC court would be solved in this quarter which would as a result improve their bottom line by several thousand crore rupees.

The current NPA provision coverage level would have allowed the banking system to take a haircut of 47 percent without any other capital requirement. This optimistic scenario further means that 53 percent recovery and Rs. 4.8 Lakh crore of equity will flow into the NPA corporates which is a huge amount by any standard. According to the global experience the peak delinquency levels, it will take 7 to 10 years to normalise the banking operations.