Higher provisioning stipulation by RBI in the policy review to impact banks’ profitability- Crisil

The impact on the profitability of individual banks will, however, vary. Since a bank’s provisioning is linked to factors such as the age of its NPAs, the available security, and its internal policy, there is a marked variance in the provisioning coverage ratios of banks. For the 35 CRISIL-rated private and public sector banks, it ranges from 30 per cent to 90 per cent. Eight banks meet the minimum threshold of provisioning coverage already; another 16 have provisioning coverage ranging from 50 per cent to 70 per cent, while the remaining 11 banks have coverage of less than 50 per cent. The impact of the provisioning on profitability may be higher for these 11 banks.

According to Mr. Pawan Agrawal, Director, CRISIL Ratings, “Despite the expected pressure on banks’ profitability over the near term, the banks are adequately capitalised in relation to their growth plans and expected asset-related risks.” The sector has strong capitalisation: as on March 31, 2009, it had Tier I and overall capital adequacy of 8.9 per cent and 13.1 per cent, respectively. The additional provisioning will also ensure that the banking system’s net worth coverage of net NPAs remains healthy, which stood at 11.7 times as on March 31, 2009.

Adds Mr. Agrawal, “CRISIL’s ratings for banks already factor in an expectation of increase in provisioning and decline in profitability. The ratings also continue to benefit from the banks’ strong capitalisation. Ratings of public sector banks also gain from a stronger and specific articulation of Government of India’s support. Therefore, CRISIL does not envisage any impact on the ratings of banks.”


(Source- Crisil release)

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