Banks may find it difficult to meet provisioning ratio deadline: Crisil

It may be difficult for scheduled commercial banks (SCB) to comply with the new provisioning coverage ratio of 70 per cent by September 2010, according to a Crisil report on the banking sector released here today.

This is because there is a risk of banks’ restructured assets surfacing as non-performing assets in the present financial year.

SCBs will have to make additional provisions of Rs 62,000 crore over the next two years to achieve a provision coverage of around 60 per cent in 2009-10 and 65 per cent in 2010-11, according to the report. The share of sub-standard assets is likely to go up to 1.6 per cent in 2010-11, from 1.2 per cent in 2008-09.

In 2008-09, the Reserve Bank of India (RBI) allowed banks to carry out a one-time restructuring of standard assets. As on March 2009, the value of the assets restructured by all SCBs stood at Rs 765 billion (Rs 76,500 crore). Restructured assets as a percentage of total advances are estimated to have increased to 3.4 per cent in 2009-10, from 2.5 per cent in 2008-09.

According to the new RBI guidelines, all SCBs are required to maintain a provisioning coverage ratio of 70 per cent by September. However, as of 2008-09, the ratio was only 57.2 per cent.

In spite of higher provisioning, Crisil Research expects net NPAs of banks to increase by 30 basis points between 2008-09 and 2010-11.

The sectors which witnessed higher restructuring were textiles, iron and steel, commercial real estate, chemicals, pharmaceuticals and infrastructure. “This increase will be the result of normal additions to gross NPAs from the existing portfolio in addition to deterioration in the quality of some structured assets,” the report said.

Following buoyant credit expansion, healthy financial profile of companies and increasing incomes of individuals, the share of standard advances in total increased to 97.7 per cent in 2007-08 from 92.8 per cent in 2003-04. The share of standard assets remained stable in 2008-09, as the restructuring process allowed some assets that would have otherwise turned delinquent to be retained as standard assets.

“The effect of restructuring is temporary, and some of those assets will eventually turn out into NPAs, leading to higher gross NPAs in the near term.”

The report expected the share of GNPAs in total advances to increase to 3.6 per cent in 2010-11 from 2.3 per cent in 2008-09. “This increase will come from a part of the restructured assets turning non-performing, especially in SME and large corporate portfolios.”