Banks face a major problem in stepping up NPA provisioning coverage

Banks have been advised to maintain provisioning coverage ratio, including floating provisions at 70% by September 2010. What does this signify for banks with less provisioning?

Banking regulator Reserve Bank of India (RBI) in its second quarter review of monetary policy has set a deadline of September 2010 for banks to step up their loan loss provisioning, including floating provisions, to 70%. RBI has advised banks to do so with a view to improving the provisioning cover and enhancing the soundness of individual banks. It has been observed that there is a wide heterogeneity and variance in the level of provisioning coverage ratio across different banks. At present, the provisioning requirements for NPAs range between 10% and 100% of the outstanding amount, depending on the age of the NPAs, the security available and the internal policy of the bank.

 However, this could have adverse effects on banks whose provisioning at present stands much below the stipulated 70%. State Bank of India, ICICI Bank, IDBI Bank, Bank of India and Canara Bank are likely to face the heat, given that their NPA provisioning as of date is well below 70%. According to a research report by Sharekhan, effectively, if the banks spread the additional required provisions equally over the next four quarters, the additional provisions would form 32.2%, 19.0% and 22.2% of the FY2010 estimated bottom line of IDBI Bank, SBI and ICICI Bank respectively.” KR Choksey Research says in its report, “The mandated coverage ratio of 70% will have varied impact on banks. SBI, ICICI Bank and Canara Bank will see increasing provisioning requirements impacting their bottom line significantly.”

 Shankar Narayanaswamy, head of credit analysis, Standard Chartered Bank, says in his report, “These banks are likely to witness a significant decline in profitability over the next four quarters to accommodate the higher provisioning requirement. We might see some impact from this quarter onwards as ICICI Bank, SBI and BOI have yet to announce their results for H1-FY10.” However, he does not see this move impacting the banks’ capital. He adds, ”We do not envisage any capital shock for these large banks as a result of this increase in provisioning requirement, as the net income for the next four quarters should adequately cover the extra provisioning required to reach the overall 70% coverage level. However, this might hasten moves to raise equity capital in the near term.”

Anand Shanbhag, head of research, Avendus Capital, feels that banks’ earnings will be weighed down by stiffer NPL provisioning norms. He says, “Profits for the next four quarters are likely to be weighed down by the mandated rise in specific provision cover to 70% by end of September 2010. RBI data for end of March 2009 reveals that 21 of the 28 public sector banks and, 16 of the 22 private banks, reported provision cover below 70%.”

Apart form NPA provisioning, RBI raised the provisioning requirement for loans to the commercial real estate sector to 1% from 0.4%. Tushar Poddar, vice president & chief economist, Goldman Sachs India says, “All these measures indicate the RBI’s intention to withdraw accommodation and prevent asset prices from spiraling upwards.”
 
 

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UB Group losing its ‘spirit’ amid stronger competition
United Breweries, the Vijay Mallya-promoted group is not exactly flying high these days, if the latest quarterly results are anything to go by. Performance was mixed at the two leading arms of the UB group—United Breweries and United Spirits. Maker of popular whisky brand McDowell’s No.1, United Spirits posted a sharp 26% decline in September quarter net profit, due mostly to high operating costs and interest payments. Net profit plunged to Rs69.60 crore from Rs93.90 crore a year earlier.

Operating profits grew marginally by 1%. Although sales volume increased 10% to 22.9 million cases, it was far below the 15% volume growth reported by the company in previous quarters. Raw material prices increased 26% while employee costs soared 66% due to special incentives. Interest costs almost doubled to Rs75.10 crore. The company, in a statement, said that the second quarter of the fiscal year is traditionally the slowest for the industry.
 
India’s largest beer maker United Breweries doubled its net profit to Rs11.71 crore from Rs5.16 crore during the same period last year, but operating profits rose only 4% over the same period. The company’s results were also helped by a strong contribution from the ‘other income’ component, which saw a 42% jump. The owner of Kingfisher brand of beer, United Breweries has been facing stiff competition from strong brands like Fosters, Heineken, Budweiser and Tuborg, which are perceived to offer better quality of beer.
 
Dr Mallya’s blatant exuberance in investing huge amounts in unprofitable ventures is also likely to hurt UB group’s performance. His investments in fancy projects like IPL franchise Bangalore Royal Challengers and Formula1 team Force India have provoked a lot of scepticism. Although the IPL outfit managed to achieve breakeven in its first year of operations despite languishing at the bottom of the points table, it is uncertain how they would be able to sustain profitability, given the high marketing and advertising spends. Meanwhile, Force India continues to incur losses, both on and off the track.
–Sanket Dhanorkar [email protected]

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ITC bleeding in trying to de-emphasise its image of a cigarette company
ITC Ltd, formerly Indian Tobacco Co Ltd, is known as a cigarette maker. However, over the past decade, the company has been trying to de-emphasise its image and present itself as a diversified conglomerate.

In this process it has merged the hotels business (ITC Hotels) and the paper business (ITC Bhadrachalam) with itself. This may have made sense but ITC’s foray into a variety of fast moving consumer goods (FMCG) products—from garments to matchboxes— has so far proved to be a disaster. During the last two years, it has lost about Rs10 billion on account of its FMCG and other ventures. Its cigarettes business, however, continues to support such adventures.

During the third quarter to end-December, ITC’s FMCG segment, excluding cigarettes, lost almost Rs1.30 billion. On the lower side, in the current quarter, the same is about Rs8.50 billion. Earlier, in June, ITC’s chairman YC Deveshwar declared that during 2008-2009 the company had invested close to Rs4.90 billion in its FMCG business, excluding cigarettes. He, however, did not want to reveal the investment figures for 2009-2010.

The Kolkata-based company forayed into the FMCG business nine years back with its lifestyle retail stores, Wills Lifestyle. Its FMCG business includes products like branded packaged foods (staples, biscuits, confectionery, snack foods and ready-to-eat foods), garments, educational and other stationery products, matchboxes, agarbattis and personal care products. 

ITC's effort to portrait itself as a diversified company is proving to be expensive. There is no let-up of the bleeding in sight, either. Losses also stem from its strategy of moving into highly competitive and money-losing businesses like garments and foods to start with rather than personal products.
- Pallabika Ganguly [email protected]

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