Nov. 1, 2009 (The Hindu Business Line) --
M.V.S. Santosh Kumar
This is to improve their cover towards non-performing assets to 70 per cent as mandated by the Reserve Bank of India in its recent Monetary Policy.
The ‘provision coverage’ is the ratio of non-performing assets (NPAs) provided for in profits, relative to the actual amount of non-performing assets for a bank.
Currently, banks have provision covers ranging from 27 per cent to 91 per cent. Only 14 of the 37 banks which have declared their September results so far have provision coverage of more than 70 per cent. The RBI perhaps hoped to strengthen the balance sheets of banks through this move, following the earlier loan restructuring.
The other 23 banks, whose provisions are below 70 per cent, may have to set aside Rs 11,000 crore. State Bank and ICICI Bank (NYSE:IBN) may have to provide around Rs 4,700 crore and Rs 1,700 crore respectively to improve the provisioning to 70 per cent.
Higher NPAs over the next one year will also add to the burden. Rating agency Crisil estimates that banks may have to provide for Rs 13,000 crore to increase the provision cover to 70 per cent.
Dent on profitability
The additional provisioning will have an adverse impact on bank earnings. Just to put provision projection in perspective, the Rs 11,000 crore to be set aside by these banks may wipe out 90 per cent of the quarterly profits of all banks. However, the averages don’t give the true picture, due to the presence of extremes. For instance, State Bank of India, Indian Overseas Bank, IDBI Bank, Vijaya Bank, Bank of Maharashtra (OOTC:BMHAF) , State Bank of Indore, ING Vysya Bank and Kotak Mahindra Bank may have to set aside provisions amounting to almost twice their September quarter net profits. There are eight other banks which have to take a hit amounting to almost one full quarter’s profit.
For banks already grappling with slowing credit growth and falling treasury income, the additional provisioning is bad news.
Bank stocks with lower provision cover have already been battered on the bourses. For instance, the stocks of Bank of India, ICICI Bank, IDBI Bank and Indian Overseas Bank have fallen by 22 per cent, 11.3 per cent, 14.3 per cent and 21 per cent from last Monday’s close.
