Payout push for bad loans provisioning

The Reserve Bank of India (RBI) notification on dividend payout has forced banks to increase their provisioning for bad debts, helping them bring down their net non-performing assets (NPAs) to below 3 per cent in 2003-04.

A senior banker of a public sector bank said RBI's notification on dividend payout had indirectly pushed the banks to make higher provisions and thereby bring net NPAs below three per cent.

If RBI had not come out with these strict norms for dividend payout, banks would have provided less, showed higher profits and declared higher dividends, banking sources point out.

 

The NPA burden
Rs crore	Provisions &  Contingencies		Ratio of NPAs To Advances, %		Net Profit
	2002-03	2003-04	2002-03	2003-04	2003-04
Allahabad Bank	349.84	412.87	7.08	2.37	463.38
Canara Bank	978.48	1520.71	3.59	2.89	1338.01
Corporation Bank	436.53	402.91	1.60	1.80	504.14
ICICI Bank	1365.01	735.38	5.21	2.87	1637.10
Indian Bank	401.42	396.71	6.15	2.71	405.75
Indian Overseas Bank	378.04	812.43	5.23	2.85	512.76
Syndicate Bank	274.66	620.12	4.29	2.58	434.13
Vijaya Bank	235.80	454.33	2.61	0.91	411.31

As per the RBI notification, the eligibility criteria for declaration of dividend by banks are that net NPA must be less than three per cent and capital adequacy ratio (CRAR) must at least be 11 per cent for preceding two completed years and the accounting year for which the bank proposes to declare dividend.

Banks should fulfil the above mentioned requisites to qualify to declare dividends without RBI approval and the dividend payout ratio must not exceed 33.33 per cent.

S C Gupta, CMD, Indian Overseas Bank, told Business Standard, "RBI's notification on dividend payout has helped banks strengthen their balance sheet , thereby making many banks bring down their net NPAs below three per cent. This will ensure less pressure on NPA provisioning in the future."

Gupta pointed out that net profits reported by banks would have been higher, if RBI had not brought in the notification, but it makes banks strengthen its financial position by providing more for bad debts and reporting less profits for the current year.

In the present scheme of things, many banks managed to post higher profits largely due to their treasury profits during 2003-04.

Only a partial increase in provisioning for bad debts in 2003-04 was due to the 90 days norm (earlier 180 days) followed from 1 April 2004, they added. In 2003, many banks had started making provisions on the new NPAs prudential norms basis.

Syndicate Bank had provided about Rs 620.12 crore in 2003-04 compared to Rs .274.66 in 2002-04 an increase of about 126 per cent over last year.

Canara Bank had provided about Rs 1520 crore in 2003-04 a 55.2 per cent increase over the last year. Of this Rs 800 crore were provided for bad debts over and above prudential norms.

R V Shastri, CMD, Canara Bank, said that the bank's net profit had increased during last fiscal and therefore the bank had made higher provisioning for bad debts. The RBI dividend payout notification is one of the major reason for banks higher provisioning.

Incidentally, Canara Bank has declared a final dividend of 25 per cent in addition to an interim of 25 per cent for 2003-04.

Indian Overseas Bank declared a final dividend of eight per cent (subject to RBI approval), besides an interim dividend of 12 per cent.

Only ICICI Bank, Corporation Bank and Indian Bank have provided less in 2003-04 compared to the previous year. ICICI Bank had provided only Rs 735.38 crore in 2003-04 compared to nearly 50 per cent higher provisioning of Rs 1,365.01 crore in 2002-03.

The increased provisioning in 2002-03 was due to remerging of ICICI Ltd and ICICI Bank, an amount of Rs 1686 crore from the sale of cross holding was allocated for provisioning of bad debts.

In the case of Corporation Bank, CMD, K Cherian Varghese said that the ratio of the bank's net NPAs to advances was 1.80 in 2003-04 compared to 1.65 in 2002-03 and hence not much provisioning was needed. He said that Corporation Bank had introduced the 90 days norms for net NPAs in December 2003.

Indian Bank provisions and contingencies in 2003-04 had marginally declined to Rs 396. 71 crore from Rs 401.42 crore in 2002-03.

However, Indian Bank's net NPA declined to 2.71 per cent for the year ending March 31, 2004 from 6.15 per cent the previous year.

Indian Bank officials were not available for comments. A banking expert said one possible reason could be that the bank's recovery must have been higher and also that they might not have added any fresh net NPA in 2003-04.

The bank's NPA recovery was highest at Rs 320 crore in 2003-04 (over the past three years).