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Saturday, 13 May 2017

YES Bank under-reported FY16 bad loan, finds RBI audit - 13 May 2017

Yes Bank

Though the Reserve Bank of India (RBI) has mandated banks to disclose the full extent of asset quality stress in their books, some private banks, it seems, continue to under-report their bad loan data.

On Friday, YES Bank’s stock price fell six per cent to Rs 1,483.85 on the BSE after a disclosure in its 2016-17 annual report, which said the RBI audit had pegged its total gross non-performing assets (NPAs) at five per cent for financial year 2015-16 (FY16), against the bank’s own assessment of only 0.76 percent for the same year. 

Analysts also say the under-reporting of numbers is not a phenomenon restricted to YES Bank. Foreign brokerage firm Credit Suisse said Axis Bank’s NPAs, according to the RBI audit, were higher at 4.5 per cent of loans versus 1.78 per cent reported by the bank in FY16, while ICICI Bank’s reported numbers at 5.85 per cent were lower than the RBI’s figure of seven percent. 

These two banks are yet to come up with their annual reports, but disclosed the numbers in a conference call with analysts after their March 2017 quarter results.

The RBI had asked banks to conduct an asset quality review in the third (Q3) and fourth quarter (Q4) of FY16, which resulted in a 70 per cent jump in their gross NPAs between September 2015 and March 2016. 

On April 18, the RBI introduced a rule that mandated banks to disclose the RBI-assessed bad debt numbers, if the divergence between the central bank’s assessment and the bank’s actual reporting was more than 15 percent. 

Closing price as on May 12; % loss is compared with previous day's closing. Sources: BSE, company data, Credit Suisse estimates In a statement, YES Bank said, “The disclosure on divergence in asset classification and provisions in NPAs in the annual audited financial statement is in conformity with the RBI circular issued on April 18, 2017.”

The divergence in the NPA data is for FY16. The bank statement also added that with the ongoing remedial actions undertaken by the bank in FY17, there have been several reductions, partial sale to asset reconstruction companies and improvement in account conduct, which significantly reduced the overall gross NPA divergence.                                  

According to analysts, the RBI’s audit of bank numbers typically happens in Q3 or Q4 of the subsequent financial year, and therefore, FY16 numbers came up for scrutiny only in the second half of financial year 2016-17 (FY17). 

In a report, stockbroking firm Macquarie said this raises questions about transparency. “While the bank managed to recover a substantial part and keep profitability intact in FY17, the issue is that investors will question the sanctity of the Rs 2,000 crore of gross non-performing loans (or 1.5 per cent of the loan book) reported for FY17,” Macquarie said, adding, however, that some of the loans were ‘current’ in YES Bank’s books, according to statutory auditors. But the RBI auditors judged these loans ought to be termed bad. 

“The outstanding gross NPA as on March 31 includes one borrower with an exposure of Rs 911.5 crore, which is expected to be recovered in the near term. Specific provision held in this account was Rs 227.9 crore,” YES Bank said. 

“Therefore, the bank reiterates that there is no carry-forward impact of the divergence observed by the RBI in FY18 (financial year 2017-18),” the bank’s statement said. 

The RBI had assessed that the bank had Rs 4,930 crore of bad loans, against the actual reported Rs 750 crore.

“Given these large divergences, the FY17 RBI audit results will be keenly awaited and the narrowing of these divergences will be key for contraction in their valuation gap to the private consumer banks,” Credit Suisse said in a report.

While Axis Bank lost 2.8 per cent, ICICI was down 1.2 per cent in Friday’s trades. ICICI Bank did not offer to comment on Business Standard’s query on the issue of divergence in the NPA figures. 

An Axis Bank spokesperson said the bank had made disclosure about the RBI’s assessment of gross NPAs for FY16 in an interaction with the media and analysts after its announcement of results for FY17.    

The Nifty Bank index fell 0.64 per cent on Friday.

“YES Bank’s numbers have come as a shock,” said Pritesh Bumb, banking analyst with Prabhudas Lilladher.

“It is a temporary phenomenon and that YES Bank has taken several measures to resolve many NPA cases. Further, it has made enough provisions and is well-covered vis-à-vis risks. We remain positive on the private banking space,” Bumb added.

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