The Reserve Bank of India may give banks a breather by extending the deadline for increasing the provision coverage for non-performing assets (NPAs) to 70 per cent from September 2010 to March 2011.
In its Second Quarter Review of Monetary Policy, the RBI had said that banks should have minimum provision coverage of 70 per cent for NPAs by September 2010.
Fearing the impact of the RBI decision on their profits, banks had sought a review of the new norm. A PSU bank official said on Wednesday on the sidelines of an international banking seminar that the RBI refused to lower the provisioning requirement from 70 per cent but conveyed to banks that the deadline will be extended by six more months. However, the central bank is yet to issue a formal communication in this regard, he added.
This leeway will allow banks to step up gradually their provision coverage, thereby reducing the impact on profits.
In the monetary policy the RBI said, “With a view to improving the provisioning cover and enhancing the soundness of individual banks, it is proposed to advise banks to augment their provisioning cushions consisting of specific provisions against NPAs as well as floating provisions, and ensure that their total provisioning coverage ratio, including floating provisions, is not less than 70 per cent.”
Recently, the State Bank of India Chairman, Mr O. P. Bhatt, had said that all banks had sought a review of the deadline. The SBI will have to provide around Rs 5,000 crore for improving its NPA coverage ratio, which has fallen to 42.87 per cent as of September-end 2009, compared with 44.14 per cent as of September-end 2008, he had said.
According to a report by rating agency Crisil, the proposed increase in NPA coverage ratio will mean that banks now have to make an additional provisioning of Rs 1,30,000 crore till end-September 2010. This estimate was based on the NPAs reported by banks as on March 31, 2009. As on this date, the banking system’s NPAs were at 2.3 per cent of total advances, while the NPA coverage was around 55 per cent.
In its report, Crisil also said that even if NPAs rise to 3 per cent by March 2010, the required additional provisioning could increase by Rs 2,00,000 crore. Therefore, the total provisioning requirement for the system could be between Rs 3,00,000 crore and Rs 3,30,000 crore till end-September 2010.
Consolidation issue
Also, on the sidelines of the seminar the RBI Deputy Governor, Dr K. C. Chakrabarty, said consolidation in the Indian banking industry is necessary, but the time for it has not yet come. The banking sector must focus on financial inclusion for now.
His comments assume significance in the light of the meeting between bankers and Finance Ministry officials to discuss consolidation, last week.
“Consolidation will happen in an industry where there is a proliferation of products and services. We are talking about consolidation in an industry where 50 per cent people are not having access to a bank account,” Dr Chakrabarty said.
While size is important to compete in the market, small banks are needed to reach out to the interiors of India, he said. For the next five years, financial products and services must be available through a bank-led model. Both large and small banks are needed, he added.
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In its Second Quarter Review of Monetary Policy, the RBI had said that banks should have minimum provision coverage of 70 per cent for NPAs by September 2010.
Fearing the impact of the RBI decision on their profits, banks had sought a review of the new norm. A PSU bank official said on Wednesday on the sidelines of an international banking seminar that the RBI refused to lower the provisioning requirement from 70 per cent but conveyed to banks that the deadline will be extended by six more months. However, the central bank is yet to issue a formal communication in this regard, he added.
This leeway will allow banks to step up gradually their provision coverage, thereby reducing the impact on profits.
In the monetary policy the RBI said, “With a view to improving the provisioning cover and enhancing the soundness of individual banks, it is proposed to advise banks to augment their provisioning cushions consisting of specific provisions against NPAs as well as floating provisions, and ensure that their total provisioning coverage ratio, including floating provisions, is not less than 70 per cent.”
Recently, the State Bank of India Chairman, Mr O. P. Bhatt, had said that all banks had sought a review of the deadline. The SBI will have to provide around Rs 5,000 crore for improving its NPA coverage ratio, which has fallen to 42.87 per cent as of September-end 2009, compared with 44.14 per cent as of September-end 2008, he had said.
According to a report by rating agency Crisil, the proposed increase in NPA coverage ratio will mean that banks now have to make an additional provisioning of Rs 1,30,000 crore till end-September 2010. This estimate was based on the NPAs reported by banks as on March 31, 2009. As on this date, the banking system’s NPAs were at 2.3 per cent of total advances, while the NPA coverage was around 55 per cent.
In its report, Crisil also said that even if NPAs rise to 3 per cent by March 2010, the required additional provisioning could increase by Rs 2,00,000 crore. Therefore, the total provisioning requirement for the system could be between Rs 3,00,000 crore and Rs 3,30,000 crore till end-September 2010.
Consolidation issue
Also, on the sidelines of the seminar the RBI Deputy Governor, Dr K. C. Chakrabarty, said consolidation in the Indian banking industry is necessary, but the time for it has not yet come. The banking sector must focus on financial inclusion for now.
His comments assume significance in the light of the meeting between bankers and Finance Ministry officials to discuss consolidation, last week.
“Consolidation will happen in an industry where there is a proliferation of products and services. We are talking about consolidation in an industry where 50 per cent people are not having access to a bank account,” Dr Chakrabarty said.
While size is important to compete in the market, small banks are needed to reach out to the interiors of India, he said. For the next five years, financial products and services must be available through a bank-led model. Both large and small banks are needed, he added.
POSTED BY:
PALLAVI SINGH
PGDM III SEM
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