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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.”