RBI may stick to loan-loss norms

Central bank unlikely to allow inclusion of write-offs in loan-loss coverage calculation.

Adding to the provisioning woes of a host of banks, the Reserve Bank of India (RBI) has indicated it would not allow them to include loan write-offs while calculating the loan-loss coverage ratio.

During a meeting with select bank chiefs on Wednesday, in response to a demand from banks, senior RBI officials had said the move was against good accounting practices, something the central bank had stood for even at the peak of the financial crisis, sources privy to the discussions told Business Standard.

In the monetary policy review last week, the central bank asked banks to have a provision coverage ratio of at least 70 per cent by September 2010. Banks have petitioned RBI to provide more time and a simpler dispensation to help them lower the provisioning burden. A higher provisioning would affect bank profitability over the next four quarters, as money would have to be set aside from the operating profit.

According to their own assessment, State Bank of India would need to set aside around Rs 5,000 crore to increase the provision coverage ratio, while ICICI Bank needed to provide around Rs 1,700 crore. According to analyst estimates, Canara Bank would need to provide around Rs 1,000 crore and Bank of India, which had a provision coverage ratio of 59.1 per cent, would need to provide an additional Rs 400 crore.

In an estimate released today, Standard and Poor’s said Indian banks would require around Rs 21,000 crore to meet the new norms. Rating agency Crisil said last week that an additional Rs 13,000 crore would be required.

Apart from accounting standards, RBI also felt banks could provide more over the next four quarters as they were making healthy profits. “It is a counter-cyclical measure to encourage banks to build up a buffer when their profitability is reasonably good,” RBI Governor D Subbarao had told Business Standard in a post-policy interview last week.

The sources also said the regulator felt a majority of the banks were already beyond the newly prescribed coverage ratio, while there were some players which did not meet the standards, prescribed for the first time. For the banking system as a whole, the loan loss coverage is to the tune of 51 per cent, Subbarao had said.