Axis Bank Tweaks NPA Policy After RBI Flags Lapses
The Reserve Bank of India has asked Axis Bank to tighten its non-performing asset management policy, following the identification of gaps in how the bank accounted for stress in vulnerable sectors, according to people familiar with the matter.
Axis Bank had been using a liberal interpretation of existing norms, which led to the classification and upgradation of accounts belonging to vulnerable sectors such as small businesses and unsecured retail loans. However, the RBI’s intervention has prompted the bank to make changes to its policy in the June quarter.
What led to the RBI’s intervention?
The RBI’s supervisory review found that Axis Bank was not always classifying accounts that showed consistent signs of weakness as non-performing assets (NPAs). This was because some dues were being repaid, even though the accounts were fundamentally weak.
This liberal approach to NPA classification had been a concern for the RBI, as it could have led to a delay in recognizing and addressing stressed assets. The RBI’s intervention aimed to ensure that banks follow stricter guidelines when classifying NPAs.
What changes did Axis Bank make to its policy?
In response to the RBI’s directive, Axis Bank made changes to its policy in the June quarter. The bank has since become more conservative in its approach to NPA classification, ensuring that all accounts that show consistent signs of weakness are classified as NPAs.
The RBI will review the changes Axis Bank has made during its annual supervisory review between July and September. The regulator will determine if the changes are sufficient to cover any gaps in norms.
What does this mean for investors?
The changes to Axis Bank’s NPA policy are significant for investors, as they indicate a more conservative approach to risk management. This could lead to a higher provisioning for bad loans, which could negatively impact the bank’s bottom line in the short term.
However, a stricter approach to NPA classification could also lead to a more sustainable banking sector in the long term. By recognizing and addressing stressed assets earlier, banks can reduce their exposure to potential losses and maintain a healthier balance sheet.
What’s next for Axis Bank?
Axis Bank’s CFO, Puneet Sharma, has stated that the RBI did not trigger the policy changes at the bank. Instead, the bank had become more prudent in its approach to NPA classification, which led to a sharp increase in bad loans in the June quarter.
The bank’s gross slippages rose to Rs 8,200 crore in Q1, leading to a net profit impact of Rs 614 crore. Axis Bank’s return on assets and return on equity also fell due to the changes.
The RBI will continue to monitor Axis Bank’s progress and ensure that the bank follows the revised policy. The regulator’s annual supervisory review between July and September will provide an opportunity for the RBI to assess the effectiveness of the changes.
Conclusion
The changes to Axis Bank’s NPA policy are a significant development in the Indian banking sector. The stricter approach to NPA classification could lead to a more sustainable banking sector, but it may also impact the bank’s short-term performance.
Investors should continue to monitor the bank’s performance and adjust their expectations accordingly. The changes to Axis Bank’s NPA policy are a reminder of the importance of prudent risk management in the banking sector.
