Banks face profitability blues

Third Quarter Review of Monetary Policy 2006-07

Provisioning hike to mar current quarter results.

Commercial banks are set to take a hit on their bottom lines in the current quarter, as they will have to set aside an additional provision of about Rs 2,000 crore.

The Reserve Bank of India has raised the provisioning against loans to commercial real estate (excluding housing loans), capital markets, personal loans and credit card receivables from 1 per cent to 2 per cent.

The RBI said in its review of the credit policy that the continued high credit growth in real estate, outstanding credit card receivables, loans and advances, qualifying as capital market exposure, and personal loans were a matter of concern.

"The increase in provisioning requirement for standard assets to 2 per cent in some sectors and also increase in risk weight to 125 per cent for exposure to non-deposit taking large NBFCs will compel banks to increase the cost of credit to such borrowers," said V P Shetty, chairman of IDBI Bank. 

FUTURE TENSE
Qtr ended	Prov & Cont	Net Profit
Dec'06	4368.70	5939.92
Sep'06	2866.97	5743.35
Jun'06	4820.60	4243.60
Mar'06	5921.92	4626.03
Dec'05	2892.28	4874.34
Sep'05	2990.75	4605.16
Jun'05	4627.59	3948.59
Mar'05	5209.65	4598.11
Dec'04	5199.30	3459.17
Sep'04	3285.65	3731.92
No of Banks: 31                                  Rs crore

The central bank pointed out that there had been a higher rate of default in credit card receivables and personal loans. By raising the required provisioning, it expected to lower the appetite for loans in these categories.

The RBI also expressed concern over the "persistently high" credit growth and said banks needed to protect their balance sheets against a build-up of loan defaults by "precautionary provisioning".

Total outstanding loans under all the four categories were Rs 2,04,708 crore as on October 27, 2006. Of this, real estate loan outstanding (excluding housing loans to individuals) accounted for at Rs 37,838 crore, an increase of 83.4 per cent over the last year's, while the receivables on credit cards went up by 51.1 per cent to Rs 11,870 crore in the same period. Receivables on personal loans stood at Rs 1,30,000 crore and capital market exposure was at Rs 25,000 crore.

At 1 per cent provisioning, banks have been setting aside Rs 2,047.08 crore, while at 2 per cent, they would have to set aside Rs 4,094.16 crore as provisioning.

UCO Bank executive director A Bhatt, said, "The policy was on expected lines. The market has been expecting the move by the central bank. Efforts by the central bank to curtail credit flow on the personal loans and the real estate sectors were expected, as these are overheated. The apex bank wants to divert this credit towards productive sectors to achieve the targets fixed by it."