This was one of the key measures introduced by RBI to strengthen the country's banking sector over the long- term. Though the move will enhance the resilience of the banking system to absorb loan losses, it will also lead to a decline in the sectors profitability over the near term. The step should also increase the consistency in banks provisioning for NPAs and facilitate a more meaningful comparison of their profits.
According to the Crisil estimates, the proposed minimum coverage for NPAs will mean that banks now have to make an additional provisioning of Rs 13,000 crore till end-September 2010.
Crisil's estimate was based on the NPAs reported by banks as on March 31, 2009. The NPAs were at 2.3% of system advances, while the NPA coverage was around 55% as on that date. Crisil was of the view that the banking systems NPAs will increase, despite significant restructuring undertaken by banks in the past six months.
Due to extensive restructuring, banks NPAs are unlikely to increase to the extent that Crisil had previously expected.However, even if NPAs rise to 3% by March 2010, as against Crisils previous estimate of 3.9%, the required additional provisioning will increase by Rs 20,000 crore. Therefore, the total provisioning requirement for the system will be Rs 30,000 crore to Rs 33,000 crore till end-September 2010.
Crisil Ratings senior director Raman Uberoi said, The expected increase in provisioning will exacerbate the profitability pressures that the countrys banks have been facing on account of pressure on fee income.
The additional provisioning will be 20-25% of the sectors expected profits for 2009-10 and 2010-11, as the impact will be spread over two years. The impact on the profitability of individual banks will, however, vary. Since a banks provisioning was linked to factors such as the age of its NPAs, the available security, and its internal policy, there was a marked variance in the provisioning coverage ratios of banks.