Bank of Baroda plans increase in provision coverage ratio to as much as 70%
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Mumbai: Bank of Baroda is targeting to increase its provision coverage ratio to as much as 70% as the bank seeks to insure itself against any spurt in bad loans, said a top executive.
“Our aging provision rule by itself forces provisions to increase. That (also) prepares the banking system as a whole to take the haircut as required to solve the problem. While we can have range of outcomes—it’s not possible to predict today what will eventually happen - increasing the coverage ratio at every opportunity is a sensible thing to do,” said P.S. Jayakumar, chief executive officer and managing director of Bank of Baroda, said in an interview.
At the end of March, Bank of Baroda had a provision coverage ratio of 66.83%, the highest among state-run banks.
Jayakumar guided for an operating profit for Rs12,000-12,500 crore for the current financial year. Even in the extreme stress case, this would be sufficient to deal with the any challenges that might crop up. In fiscal 2017, the bank made an operating profit of Rs10,795 crore
Bank of Baroda had net non-performing assets of Rs18,000 crore at end of March. As a percentage of loans, this stood at 4.72% and the bank wants to cut it to at least 3.5%.
Extra provisions is something which Bank of Baroda is not the only bank to do. Announcing earnings on Friday, State Bank of India chairman Arundhati Bhattacharya also guided for increased provisions in the current fiscal. One reason why credit costs will remain elevated is because banks are also expecting to take a write-down in the value of their bad loans. Earlier this month, the government gave the RBI more teeth by empowering it to deal directly with bad loans
Jayakumar said Bank of Baroda has created a stressed asset management group where large ticket accounts are directly managed. He also said that bank was lending to a few non performing accounts – which had operable or near operable assets as underlying - in order to keep the account active and cut losses .
What help’s Bank of Baroda is the granularity of its loans and a diversified loan book. According to Jayakumar, barring a couple of large – Rs 2,000-3,000 crore accounts, the rest of the lender’s stressed loans are dispersed across accounts.
Earlier, when announcing the results on Thursday, Jayakumar said that he didn’t see the bank’s bad loan numbers rising more than an additional Rs 3000 crore. He also said that the so-called special mention accounts-2 (those with dues overdue between 60-90 days) accounted for about Rs 8,000 crore.
“BoB has been slowly improving its operating performance. However, challenging environment took a toll. Despite high credit costs and weak margins, the bank will still generate near-term RoE (return on equity) of 10-11%,” said Edelweiss Securities Ltd in a 19 May report.