A higher provisioning requirement for restructured standard loan accounts is likely to dent banks’ profit further in the current quarter. This would give them little scope to pare lending rates.
The Reserve Bank of India (RBI) on Tuesday said banks would have to maintain 2.75 per cent of restructured standard loan accounts as provisions instead of the current two per cent, to ensure financial stability and mirror the international best practices.
The move appears to have dwarfed the central bank’s decision to cut banks’ cash reserve ratio (CRR) by 25 basis points (bps) and infuse Rs 17,500 crore of primary liquidity in the system.
| AT THE RECEIVING END Impact of higher provisioning on banks’ profits | |
| Bank | Impact on FY13 profit before tax (in %) |
| Bank of India | 4.5 |
| Allahabad Bank | 3.4 |
| Corporation Bank | 3.3 |
| Punjab National Bank | 2.9 |
| Andhra Bank | 2.8 |
| Canara Bank | 2.8 |
| United Bank of India | 2.5 |
| State Bank of India | 1.5 |
| ICICI Bank | 0.3 |
| Axis Bank | 0.4 |
| HDFC Bank | 0.1 |
| Source: Emkay Global Financial Services | |
“Part A (on CRR cut) is welcome. But in Part B (on higher provisioning), we had an unpleasant surprise. In fact, we were looking for some relief on the restructured front... Though we very much intended to give all of you good news, the path that has been taken will limit us to a great extent,” K R Kamath, chairman and managing director of Punjab National Bank, told reporters after his meeting with the RBI brass.
He added: “The impact of a 75-bps additional provision is estimated around three per cent on the net profit of banks. I don’t think we are in a position to earn three per cent of the profit by the CRR cut. So, to that extent, we are in deficit now.”
Earlier, the banking regulator had constituted a working group chaired by its executive director, B Mahapatra, to review the guidelines on restructured loans. In its report given in July, the group had suggested the provision on restructured advances be raised to five per cent, in a phased manner over two years.
Anand Sinha, deputy governor at RBI, said, “We are going to bring it into operation from March 2013 balance sheet.” He was referring to new norms on restructuring assets.
Analysts say the recent rise in loan restructuring cases is likely to have persuaded RBI to mandate the stringent norms. The number of cases referred to the corporate debt restructuring (CDR) cell increased to 392 at end-March 2012 from 225 as of March 2009. The total debt considered for restructuring was estimated at Rs 206,493 crore at the end of March 2012.
Bankers, however, claim the record shows only 15 per cent of restructured assets have turned non-performing and a higher provisioning on restructured loans was not a necessity. They said RBI would come out with the final guidelines on loan restructuring and provisioning requirements by March 2013.
State-run banks are expected to be more affected than their private sector rivals. “We expect this to impact our 2012-13 profit before tax estimates by 0.1 to 4.5 per cent, across various banks. Worst hit will be public sector banks like Bank of India, Allahabad Bank, Corporation Bank and Canara Bank,” said Dhananjay Sinha, economist at Emkay Global Financial Services.
After the announcement, the National Stock Exchange’s 12-share Bank Nifty shed 2.4 per cent in on Tuesday ’s trade.
