A week after the Reserve Bank of India asked banks to raise the loan-loss coverage ratio to 70 per cent, the issue is still haunting bankers.
At the post-policy feedback meeting with the central bank today, bankers, who would need to set aside the funds by September 2010, sought additional time and more flexibility to comply with the directive.
According to rating agency Crisil’s estimates, banks would need to provide an additional Rs 13,000 crore to meet the norms for which detailed guidelines would be issued shortly.
Banks such as State Bank of India (SBI) would need to set aside around Rs 5,000 crore over the next four quarters, while ICICI Bank might have to provide around Rs 1,500 crore. Today’s meeting, which focused on operational issues such as implementation of the Basel II norms and the introduction of International Financial Reporting Standard (IFRS), was attended by select bankers, banking sources said.
The list of those who were at the meeting included State Bank of India Chairman OP Bhatt, Punjab National Bank Chairman and Managing Director KR Kamath, ICICI Bank Managing Director and CEO Chanda Kochhar, Union Bank of India Chairman and Managing Director MV Nair, Axis Bank Managing Director and CEO Shikha Sharma, Citibank head for South Asia Mark T Robinson and HSBC country head Stuart Davis.
On provisioning, banks such as SBI have demanded a longer period to comply with the norms. In addition, bankers reiterated the demand to include provisions for written-off loans while calculating the loan-loss coverage ratio.
According to Crisil, the measure will enhance the resilience of the banking system to absorb loan losses. It, however, will adversely impact the sector’s profitability in the near term. The step is expected to increase the consistency in banks’ provisioning for non-performing assets (NPAs) and facilitate a more meaningful comparison of their profits.
The Crisil estimate of Rs 13,000 crore of additional funds required by banks for provisioning is based on the NPAs reported by banks as on March 31, 2009. The NPAs of banks were 2.3 per cent of system advances, while the coverage was around 55 per cent.
The banking system’s NPAs will increase, despite significant restructuring undertaken in the past six months. Though the NPAs are unlikely to increase to the extent that rating agency had previously expected.
However, even if NPAs rise to 3 per cent by March 2010 as against the previous Crisil estimate of 3.9 per cent, the required additional provisioning will increase by Rs 2,000 crore. Hence, the total provisioning requirement for the system will be Rs 30,000 to Rs 33,000 crore till end-September 2010.
While banks have to comply with the IFRS norm from the next financial year, in practice they have to prepare accounts according to IFRS norm for 2009-10 to give comparable numbers.
The present level of preparation is not enough to meet the March 2011 deadline. Plus, banks needed clarity on reporting treatment for which RBI needs to issues clear guidelines, he added.