Banks might be dropping their guard against bad loans. This is evident from the fact that the banking system’s provision coverage ratio (PCR) has dropped below 50 per cent, compared with as much as 70 per cent only two years ago.
The bad loans, which have increased significantly, are eating into profits of Indian banks, especially the public-sector ones, leading to a sharp decline in their provision coverage ratio (PCR). As of September-end, banks’ loan loss ratio had fallen below 50 per cent, from 54 per cent as of March-end, Reserve Bank of India (RBI) Executive Director B Mahapatra said at the annual banking conference, BANCON, on Saturday.
Earlier, banks were required to mandatorily maintain a provision coverage ratio of 70 per cent. But the mandate was withdrawn in September 2011, when most banks had met the criterion. But now, with a rise in the level of banks’ loans turning bad and a sharp rise in restructured advances — for which they need to make provisions — they have lowered the overall provisioning for non-performing assets (NPAs). As a prudential measure, RBI expects banks to maintain a high level of overall provision, over and above the regulatory requirement for individual loan losses.
According to RBI Deputy Governor K C Chakrabarty, banks will need to increase their provisioning from the current level. “Internationally, provisioning is 70-80 per cent. RBI does not stop banks from making floating provisions,” he said at the conference.
To improve the asset quality in the banking sector, RBI was set to frame new rules and would incentivise banks that were proactive in early detection and resolution of NPAs, he said, adding the decision to allow restructuring with retrospective effect in 2008 had turned out to be counter-productive and killed credit quality.
He said banks suffered from inadequate project appraisal, primitive information system and weak credit monitoring. “There is need for quick decisions in dealing with stressed loans — NPAs, as well as restructured loans.”
He also said banks needed to be much more stringent in appraising big-ticket accounts. “Many corporate accounts have high leverage ratios, meaning high debt component and low equity. Banks must insist on higher equity contribution from promoters.”
Chakrabarty came down heavily on public-sector banks, saying some of these were working as venture capital funds — they provided huge loans to companies, while promoters chipped in very little capital.
Asset quality situation deteriorates further if restructured accounts and write-offs are included. “This is especially true of public-sector banks. By March 2013, the impaired asset ratio of these banks had risen to 12.1, from 6.8 per cent in 2009,” Chakrabarty said. As at the end of March, the ratio was 6.8 per cent in the case of old private banks, 5.3 per cent for new private ones and 6.4 per cent for foreign banks.
RBI data suggest the situation of provision coverage for stressed assets (NPAs and restructured assets) is worse. The PCR for NPAs (plus restructured loans) for the banking sector fell to 30.25 per cent in March, from 34.47 as at the end of the same month in 2009. For public-sector banks, the combined PCR of which fell from 38.4 per cent in 2009 to 27.71 per cent, the situation is grimmer.
To improve the asset quality in the banking sector, the central bank is set to frame new rules and will incentivise banks that are proactive in early detection and resolution of NPA. He said the decision to allow restructuring with retrospective effect in 2008 turned out to be counterproductive and killed credit quality.
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