Steep provisioning norms to stress state-run banks' earnings

Banks like Punjab National Bank, Indian Bank and Oriental Bank of Commerce would be hit the maximum, says report

Most state-run banks' earnings are likely to remain under stress in the coming quarters following the Reserve Bank of India's (RBI) proposal to increase the provisioning requirement for restructured loans sharply.

The central bank has suggested that banks will need to step up provisioning on restructured loans by 100 basis points from 2013-14 to 3.75% on the existing stock of restructured loans. Banks will have to increase it further to 5% by 2014-15.

Also, all new incremental restructured loans will attract a charge of 5% from April 1, 2013. While at present banks can maintain the same asset classification on loans even after debt recast, from April 2015 restructured loans will fall into sub-standard category. Only for loans to infrastructure projects the asset classification benefit will continue beyond April 2015.

 

"The biggest impact may be for Punjab National Bank, Indian Bank and Oriental Bank of Commerce having 10% of loans in restructured category...While the impact on earnings may be somewhat less as some of these loans could get upgraded, we estimate at least 3-8% of earnings hit for the banks through 2013-14 and 2014-15. Private banks would be least impacted, with impact estimated at less than 1-2%," Rajeev Verma and Veekesh Gandhi, analysts with Bank of America Merrill Lynch, said in a note to clients.

The financial performance of some of the state-run banks already deteriorated in October-December quarter due to provisioning requirement on restructured advances. Banks had to make 75 basis points more provisions at 2.75% on restructured loans during the quarter following RBI's mandate.

For instance, Kolkata-based Allahabad Bank's net profit fell by 44.5% year-on-year during the third quarter on account of higher provisions.

"Our net profit declined from a year ago due to higher provisions. The increase in provisions was on account of addition of non-performing assets. As per the new norms, we had to provide more for restructured advances. We also made provisions in anticipation of wage increases," Shubhalakshmi Panse, chairperson and managing director of Allahabad Bank, said in her post-earnings comments.

Analysts said the proposed guidelines were likely to ensure loan restructuring of only viable accounts.

"We believe the proposed guidelines are in the right direction and would, hopefully, act as another deterrent for 'shallow' restructuring that tends to happen. Further, it also seeks to enhance promoters' contribution and personal guarantees from promoters to ensure restructuring is done for only viable cases," Bank of America Merrill Lynch analysts said in the note.