Indian Banks anticipate rise in credit losses

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.

According to Standard & Poor's Ratings Services, they are likely to boost their provisioning cushions and bring coverage ratios in line with their major Asian peers, said the report titled "Indian Banks Stand To Gain More Than Lose From The Pain Of Higher Provisioning Coverage."

"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 NPLs following a benign phase for the industry," said Standard & Poor's credit analyst Ritesh Maheshwari.

"Naturally, 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 Standard & Poor'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, we expect this change in coverage requirement, along with expected increase in NPL, to lead to provisioning charge in fiscal 2010 and six months ended 30 September 2010 of about US$15.29 billion, of which US$4.48 billion alone will be due to the higher specific coverage requirement.

"However, 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," Mr. Maheshwari said.

At the individual bank level, the impact on profitability will vary depending on the bank's current coverage ratio, which for Standard & Poor's rated portfolio varies from 30 to 80 percent. Ms. Geeta Chugh, Standard & Poor's credit analyst, added, "Nevertheless, 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."