Banking: Easier provisioning

Source :BS :Malini Bhupta / Mumbai April 26, 2011, 0:07 IST

Banks will benefit from the changed norms as credit costs will come down.

The Reserve Bank of India (RBI) unexpectedly relaxed the provisioning norms for non-performing loans (NPLs) last week.

Unlike the past, banks will now have to maintain a provisioning coverage ratio (PCR) of 70 per cent for gross NPLs as on September 30, 2010, after which they would be free to make provisions for incremental NPL formation, in accordance with their internal policies.

Definition of NPLs differs from bank to bank, depending on the NPL’s age. Effectively, this means that every quarter, banks would no longer have to provide Rs 70 for every Rs 100 in bad loans. This will enhance profitability, particularly of PSU banks.

The central bank has eased the 70 per cent NPL coverage norm it had introduced as a macro-prudential measure in December 2009. This requirement will no longer apply to NPLs built up after September 2010. The central bank had asked banks to maintain a PCR of 70 per cent (including technical write-offs in total provisions).

Religare considers this a positive development for banks, as it would lead to lower credit costs on incremental NPLs. State Bank of India would probably be the biggest beneficiary, as analysts believe the bank was struggling to meet the enhanced requirements. Over the next five quarters, SBI’s provisioning expense will be lower by Rs 2000-2500 crore.

However, banks will not be able to reverse the excess floating provisioning they have already made. Indian banks had increased their internal provisioning requirement or, had made a floating provision, to meet the 70 per cent PCR requirement.

Surplus provisions (floating provisions for advances not used as tier II capital) provided against the prudential norms adopted by banks so far, would now have to be segregated into an separate account named as ‘countercyclical provisioning buffer’.

This buffer could be used by banks for making specific provisions for NPAs during periods of a system-wide downturn, with prior approval of the RBI. We believe this could lead to smoothening of earnings for Indian banks.

Credit Suisse says that while private banks have historically maintained coverage well above regulatory norms, PSU ones are now unlikely to follow through on their plans of raising coverage levels to 80-85 per cent. Consequently, the brokerage has upgraded PSU banks earnings by 6-14 per cent for FY12, and 2-9 per cent for FY13. However, no re-rating of the banking sector is likely just yet.