SBI may provide more to cover bad assets

State Bank of India (SBI), the country’s largest lender, is expected to set aside more funds to meet the new norms that mandate 70 per cent provision coverage for non-performing assets (NPAs).

Despite relaxation in the norms that allowed banks to include write-offs while calculating the coverage ratio, SBI’s provision cover is expected to reach 58 per cent as against under 50 per cent at the end of September 2009.

“After taking loans classified as assets under collection into account, provision coverage has risen to 58 per cent,” SBI Chairman OP Bhatt said at Bancon on Monday.

Bank of India has a provision coverage ratio, including technical write-offs of 68 per cent, just shy of the 70 per cent-mark.

Provision coverage ratio is the ratio of a bank’s total provisions to gross NPAs. In its mid-term credit policy review, RBI had said banks would have to attain a minimum 70 per cent coverage ratio by September 2010.

The central bank had later relaxed the norms by allowing banks to include technical write-offs in the computation of provision coverage ratio. Technical write-offs refer to loans fully provided for and written off from a bank’s books at the central level. However, these assets may continue to remain on the books at the branch level.

“RBI is rightly concerned if banks are providing enough for NPAs,” Bhatt said. However, there should be a clearly defined method for calculating the coverage ratio, Bhatt said, adding 70 per cent appeared arbitrary.

Instead, provisioning standards could be made more stringent. Risky sectors, such as small and medium enterprises (SMEs), could have a higher weightage, Bhatt said.

Another public sector lender falling short of the 70 per cent-mark is Indian Overseas Bank with its coverage ratio at 62 per cent, a bank executive said.

Commenting on interest rates, Bhatt said they would go up in coming months if RBI tightened its monetary stance. He also warned that loan defaults, particularly from the SME segment, might rise over the next two quarters. “Inflation is rising and there are fears that regulatory action may lead to hardening of interest rates,” he said.

Bhatt said bank lending would climb 20-25 per cent over the next three to five years.