Friday November 6, 03:14 AM

Source: Indian Express Finance

Indian banks to cash in on higher provisioning coverage: S&P

By fe Bureau
Indian banks stand to gain from higher provisioning coverage, according to the latest report published by Standard & Poor s (S&P). At the industry level, S&P expects the provisions charged to profit and loss statements in fiscal 2010 and 2011 together to be about Rs 9,45,00 crore. This reflects the change in specific loan-loss coverage requirement and the expected increase in non-performing loan (NPL). The increase in specific coverage requirement per se is likely to lead to a provisioning of about Rs 2,38,00 crore by the end of fiscal 2011, which will translate into 15 basis points of average assets in fiscal 2010 and 22 basis points in fiscal 2011. However, the impact on profitability may be subdued if the Reserve Bank of India (RBI) extends the September 2010 deadline or allows banks to include technical loan write-offs as part of provisions. The impact on profitability may also be subdued if the banks reduce the extent of write-off and replace it with provisioning. Till date, banks have been prudent in writing off bad assets. Moreover, tax laws have also offered incentives to banks to write off than to create additional provisions. However, with this new requirement, in the short run, banks could choose to reduce write-off to limit pressure on earnings. Overall, S&P expects core earnings of banks in India to continue to be supported by gradual productivity gains and higher fee income. S&P observes that the banks with lower coverage ratio will see a higher impact on profitability than those with already high coverage ratio. S&P does not expect any Indian bank ratings to be lowered because of this higher coverage ratio, as it tends to focus on the core profitability of the banks and its estimates of likely credit losses rather than the reported provisioning or profitability. In S&P s opinion, this acknowledges the higher-than-accounted future credit-loss provisions that we have been anyway incorporating in our ratings of banks that had low provisioning cover. S&P believes that the RBI s step is in the right direction and correctly anticipates a rise in credit losses in future, which are currently understated by low absolute level of NPLs following a benign phase for the industry. This move should enhance the preparedness of individual banks in coping with the likely credit losses. The coverage ratios for Indian banks are lower compared to their Asian peers. We expect this move to correct Indian banks position in Asia.