S&P says Indian banks stand to gain more from higher provisioning  

November 5, 2009

Standard & Poor's Ratings Services said Indian banks are likely to gain more than they lose from the latest step taken by the Reserve Bank of India to tighten provisioning norms.

In a report titled 'Indian Banks Stand To Gain More Than Lose From The Pain Of Higher Provisioning Coverage', the ratings agency said that domestic banks are likely to boost their provisioning cushions and bring coverage ratios in line with their major Asian peers.

"We believe it's a step in the right direction and the move is likely to enhance the soundness of individual banks and correctly anticipates a rise in credit losses in future which are currently understated by low absolute level of non-performing loans (NPLs) following a benign phase for the industry," said S&P's credit analyst Ritesh Maheshwari.

Following the policy decision, banks' reported profitability would be suppressed in fiscal year 2010; ending March 2010 and fiscal 2011 as the banks set aside profits to comply with the higher provision levels. In S&P's opinion, this acknowledges the higher-than-accounted future credit loss provisions that we have been incorporating in our ratings of banks with low provisioning cover," Mr Maheshwari said.

At the industry level, S&P said it expect this change in coverage requirement, along with expected increase in NPL, to lead to provisioning charge in fiscal 2010 and six months ended September 2010 of about Rs71,600 crore, of which Rs21,000 crore alone will be due to the higher specific coverage requirement.

However, Mr Maheshwari said, the impact on profitability may be subdued if RBI extends the September 2010 deadline or if it 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 instead.

Talking about the impact on profitability for individual banks, Geeta Chugh, S&P's credit analyst, said, "We do not expect any Indian bank ratings to be lowered because of this higher coverage ratio, as we tend to focus at the core profitability of the banks and our estimates of likely credit losses rather than the reported provisioning or profitability."
-Yogesh Sapkale [email protected]