Banks have been found dropping the guard against bad loans with the provision coverage ratio of the system as a whole has now dropped below 50 per cent, which used to as high as 70 per cent two years back.
Mounting bad loans has eaten into the profits of Indian banks, particularly public sector banks, and has led to sharp decline in the provision coverage ratio.
As on end September, loan loss ratio of banks have fallen below 50 per cent, from 54 per cent in March end, said B Mahapatra, executive director, Reserve Bank of India (RBI) at the annual banking conference, BANCON.
Earlier, banks have been mandated to maintain provision coverage ratio of 70 per cent but from September 2011 – when most banks meet the criteria, the mandate was withdrawn.
However, as banks continue to see more and more loans turning bad and sharp rise in restructured advances – for which they need to made provision – they lower the overall provisioning on NPAs.
As a prudential measure, RBI expects banks to maintain higher level of overall provision, over and above the regulatory requirement for individual loan loss.
According to K C Chakraborty, deputy governor, RBI, banks will need to increase provisions from the present level.
“Internationally provisions levels are in the region of 70-80 per cent. RBI does not stop banks from making floating provisions,” Chakrabarty said at the conference.
According to Chakrabarty, banks suffer from inadequate project appraisal, primitive information system and weak credit monitoring. “There was need for quick decisions in dealing with stressed loans – non-performing assets well as restructured loans.”
He also said banks need to be much more stringent in apprising big ticket accounts. “Many corporate accounts have high leverage ratio, meaning high loan debt and low equity component. Banks must insist on higher equity contribution from promoters,” Chakrabarty said.
He came down heavily on public sector banks as some of them were working for venture capital providers, indicating they provided huge loans to companies while promoters chipped in very little capital.
The scenario of asset quality, deteriorates further if restructured accounts and write-offs are included. “This especially true of public sector banks. In March 2013 impaired assets ratio of PSBs was 12.1, up from 6.8 per cent in 2009,” Chakrabarty said.
In the case of old private banks it is 6.8 per cent, for new private banks it is 5.3 per cent and for foreign banks it is 6.4 per cent at end of March 2013. According to RBI data, coverage provision for stressed assets (NPA + restructured assets) the picture become further worse.
The PCR for NPAs plus restructured loans for banking sector has fallen to 30.25 per cent in March 2013 from 34.47 in March 2009. For public sector banks the situation is further grim with combined PCR falling from 38.4 per cent in 2009 to 27.71 per cent.
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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