A quick calculation shows that some banks are more affected than others. State Bank of India, ICICI Bank and Canara Bank, which had low provisioning cover, will be impacted more by this measure than others, a report prepared by Standard Chartered said.
In its quarterly policy review, Reserve Bank had asked banks to ensure that their provision coverage ratio reaches 70 per cent by September end 2010. Provision coverage ratio is the percentage of loan that a bank would lose if it has to write off that account.
These banks are likely to witness a significant decline in profitability over the next four quarters to accommodate the higher provisioning requirement, StanChart said.
At present, SBI has a provision coverage of 45 per cent while ICICI Bank and Canara Bank have 52 per cent and 28 per cent respectively.
As of now, banks are permitted to make provisions in the the range of 10 per cent-100 per cent of the outstanding amount, depending on the age of the NPLs and the security available.STANCHART 2 LAST However, higher provisioning requirement is unlikely to cause any capital shocks for these large banks, StanChart said in the report.
We do not envisage any capital shock for these large banks as a result of this increase in provisioning requirement, as the net income for the next four quarters should adequately cover the extra provisioning, the report said.
As the first phase of exiting from its accommodative policy stance, the Reserve Bank also restored the SLR limit of banks to 25 per cent from 24 per cent earlier.