Bank profits could take a knock over the next four quarters, with the Reserve Bank of India (RBI) today mandating a loan-loss coverage ratio of 70 per cent.
This means banks will have to set aside money from the profits they earn over the next four quarters. RBI Governor D Subbarao told Business Standard in an interview that the coverage was around 51 per cent at present.
According to a Kotak Securities estimate, lenders such as State Bank of India, ICICI Bank and Canara Bank will need to step up provisioning, while HDFC Bank, Allahabad Bank, Bank of Baroda, Punjab National Bank, Indian Bank and Corporation and Union Bank of India already have a coverage ratio of over 70 per cent.
| WHO NEEDS TO MAKE MORE PROVISIONS | |
| Bank | Coverage ratio (%) |
| Canara Bank | 27.8 |
| Dena Bank | 37.8 |
| SBI | 45.1 |
| Indian Overseas Bank | 48.6 |
| ICICI Bank | 51.9 |
| Bank of India | 55.7 |
| Axis Bank | 63.2 |
| Note: Data for SBI, ICICI Bank, BoI, IOB pertains to April-June 2009 Source: Kotak Securities | |
The study said SBI would have to provide Rs 3,800 crore over the next four quarters to meet the stipulated 70 per cent coverage ratio, while ICICI Bank would need to provide Rs 1,758 crore, taking into account these banks’ first-quarter earnings.
Similarly, Canara Bank needs Rs 989 crore additional provisioning, while Indian Overseas Bank will have to set aside an additional Rs 500 crore to comply with the new norms.
Observing a wide heterogenity and variance in the level of provisioning coverage ratio across different banks, RBI has asked the banks to augment their provisioning cushions, consisting of specific provisions against non-performing loans, as well as floating provisions.
Banks have to comply with the new norms by the end of September 2010.
“Our provision requirements according to RBI norms are 40-42 per cent, which means we have a higher percentage of NPAs in the recoverable class.
Over the past four-five ,years we have seen that a large portion of our assets slide into the sub-standard category and slide back into the standard category,” said State Bank of India Chairman O P Bhatt.
“When you execute a write-off, your provision coverage drops drastically, whereas if you don’t write it off and continue to provide for the asset your provision, te coverage remains high,” he added.
Stipulation of higher provisioning would result in 20 basis point reduction in the capital adequacy ratio of SCBs. The ratio stood at 13.2 per cent as of the end of March, rating agency Credit Analysis & Research said.
