'Banks to be hit by extra provisioning'

Crisil believes that though the measure will enhance the resilience of the banking system to absorb loan losses, it will also lead to a decline in profitability for banks.
Crisil estimates that the proposed minimum coverage for NPAs will mean that banks now have to make an additional provisioning of Rs 13,000 crore till end-September 2010. Crisil’s estimate is based on the NPAs reported by banks as on March 31, 2009: the NPAs were at 2.3 per cent of system advances, while the NPA coverage was around 55 per cent as on that date.

It believes that the banking system’s NPAs will increase, despite significant restructuring undertaken by banks in the past six months. If NPAs rise to 3 per cent by March 2010, as against previous estimate of 3.9 per cent, the required additional provisioning will increase by Rs 20,000 crore. Therefore, the total provisioning requirement for the system will be Rs 30,000 crore to Rs 33,000 crore till end-September 2010, the report said.

Crisil Ratings Senior Director Raman Uberoi said, “The expected increase in provisioning will exacerbate the profitability pressures that India’s banks have been facing on account of pressure on fee income.” The additional provisioning will be 20 to 25 per cent of the sector’s expected profits for 2009-10 and 2010-11, as the impact will be spread over two years.

Impact of profitability
The impact on the profitability of individual banks will, however, vary. Since a bank’s provisioning is linked to factors such as the age of its NPAs, the available security, and its internal policy, there is a marked variance in the provisioning coverage ratios of banks.

Eight banks meet the minimum threshold of provisioning coverage already; another 16 have provisioning coverage ranging from 50 per cent to 70 per cent, while the remaining 11 banks have coverage of less than 50 per cent.