Banks ask RBI to ease higher loan-loss coverage burden

Seek inclusion of write-offs; RBI says no to deadline extension.

Banks have approached the Reserve Bank of India (RBI) to allow loan write-offs to be treated as part of the 70 per cent loan loss coverage mandated by the regulator.

Yesterday, RBI had asked banks to provide money over the next four quarters to provide a higher coverage for sticky assets. The move, which Crisil said would result in an additional provisioning of Rs 13,000 crore for Indian banks, was expected to affect profitability. At present, banks have a loan loss coverage of 51 per cent.

According to a public sector bank chief who attended the post-policy meeting with RBI Governor D Subbarao, a section of bankers conveyed their difficultly in adhering to the new provision coverage regime in a year’s time. Bankers have also expressed concern that their profitability would be hit if they have to increase the provision for coverage to the RBI’s stipulated level within one year.

The issue also came up for discussion during a meeting convened by Finance Minister Pranab Mukherjee on Wednesday.

Banks such as State Bank of India, which is expected to provide around Rs 4,000 crore, were at the forefront of the demand. However, RBI was reported to have turned down the banks’ requests, as the it thinks profitability of the banks are increasing about 35-40 per cent every year, so it is time for create a buffer.

“We have requested for allowing the provisions that are extinguished on account of prudential write off to be reckoned as PCR (provision coverage ratio),” a bank chief said.

“The RBI has assured us they will re-look at the issue,” another bank government bank chairman said.

Some of the bankers said in the meeting that increasing specific provisions for sub-standard assets should be considered as an alternative rather than increasing the provision coverage ratio.

“When already there are norms and they are working well for the banking system, then why should they make the norms further stringent?” asks another bank chief.

Among banks which have lower provision coverage ratio are Canara Bank (27.8 per cent), Dena Bank (37.8 per cent), State Bank of India (45.1 per cent), Indian Overseas Bank (48.6 per cent) and ICICI Bank (51.9 per cent).

According to a study by Kotak Securities, SBI would have to provide Rs 3,800 crore over the next four quarters to meet the stipulated 70 per cent coverage ratio, while ICICI Bank would need to provide Rs 1,758 crore, taking into account the figures of these banks’ first-quarter earnings.

Similarly, Canara Bank needs Rs 989 crore of additional provisioning, while Indian Overseas Bank would require to set aside an additional Rs 500 crore more to comply with the new norms.