RBI Asks Indian Banks To Make Higher Provisions On Bad Debts

Published: 28-Oct-2009

The central bank also directs banks to keep aside more money when they offer credit to the commercial real estate sector

In the wake of the Reserve Bank of India (RBI) directing Indian banks to raise the minimum provision ratio for bad debts to 70% from 10% by September 2010 in its credit policy review, Indian banks may see their profits being marginally hit in the near future – reported Reuters. The central bank has also directed banks to keep aside more money when they offer credit to the commercial real estate sector.

RBI said the hike was mainly due to a raise in the flow of credit to the commercial real estate sector and the extent of restructuring of loans. It has added that the move was aimed at improving the provisioning cover and propping up the financial health of individual banks.

Reportedly, public sector lenders like State Bank of India and ICICI Bank are expected to be among the most impacted. In a research note, analysts at Citigroup have estimated that SBI's pre-provision profits in the year to March 2010 could be hurt by nearly 20% and ICICI's by 7.4%. However, private sector banks such as Axis Bank and HDFC Bank, which have already high provision coverage, are not expected to be hurt.

According to The Economic Times, Chanda Kochhar, CEO of ICICI Bank, said: “There is no issue of asset bubble as such. The provisioning of loans extended to commercial real estate was high previously. Subsequently, the credit flow to this sector fell, which impacted its activity. Now that the activity has picked up in this sector, RBI has raised provisioning requirement back to the old levels. But banks’ exposure towards commercial real estate sector is low. NBFCs and mutual funds are more active in this space.”

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