Private bank profits see impact of alternate investment fund provisions

Higher risk weights on unsecured loans deplete capital

The bottom lines of several private sector banks have taken a hit following the recent guidelines released by the Reserve Bank of India (RBI) on alternate investment fund (AIF) investments.

Last month, the RBI announced that regulated entities, such as banks, non-bank lenders, and home financiers, cannot invest in AIFs that have directly or indirectly invested in companies that have borrowed money from the lenders.

In case an entity had already made such an investment, they must liquidate the investment or make 100 per cent provision, RBI had said.

HDFC Bank – the largest private sector lender, along with ICICI Bank and Kotak Mahindra Bank have made provisions complying with the central bank’s guidelines.

HDFC Bank made a provision of Rs 1,200 crore for such investments, while ICICI Bank made a provision of Rs 627 crore. Kotak Mahindra Bank’s provision for such investments stood at Rs 190 crore.

“On AIF, our book was Rs 1,220 crore. The fair value is Rs 500 crore more than that. However, the current applicable RBI circular asks to take a provision by January 18. On a prudent basis, we have created a contingent provision for the 100 per cent of the AIF value, which is on our books,” Srinivasan Vaidyanathan, the chief financial officer of HDFC Bank, said in the post earnings media call.

ICICI Bank’s total provision in the third quarter almost doubled to Rs 1,050 crore as compared to Rs 583 crore in the second quarter, due to AIF investments.

“Core credit cost remained lower but the total credit cost was higher led by higher provisions pertaining to investments in AIF,” Rahul Malani, deputy V-P Fundamental Research, banking and NBFC analyst, Sharekhan by BNP Paribas.

IndusInd Bank has not made any provision towards AIFs as it plans to liquidate its Rs 113 crore investment.

Axis Bank is set to announce its earnings on Tuesday.

“This quarter, we had two difficult hits in the bank’s standalone. First is the Rs 190 crore hit on the account of provisioning towards the AIF investments. The second was on account of the trading book where we had a fixed income book, net of OIS… we took a hit of Rs 168 crore in this quarter,” said Jaimin Bhatt, group president and group chief financial officer, Kotak Mahindra Bank.

The banks that have announced the Q3 earnings have reported a drop in the capital adequacy ratio due to the highest risk weights on unsecured loans prescribed by RBI in November last year.

Risk weights for unsecured loans increased from 100 per cent to 125 per cent.


Disclaimer: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd