New Delhi: The relaxation in norms for provision of bad loans will help commercial banks in India. Banking regulator RBI has said that banks need not maintain a 70% provision coverage ratio beyond September 2010 on an ongoing basis. According to RBI, for incremental NPAs (non-performing assets), banks can now revert to the old practice of staggered provisions, depending on quality of the assets.
A BRICS Securities note says:
Any provision held in excess of calculated amount will be under separate account ‘counter-cyclical provisioning buffer’ that may be used to make specific provision during system wide downturn with prior approval of RBI. While we have been cautious on banks owing to several headwinds – pension-II, NIM compression, growth slowdown – some pressure on bottom line will be offset by lower credit costs, which should lead stocks higher, near-term.
The brokerage calculates that State Bank of India is expected to benefit the. Deutsche Bank and JP Morgan upgraded the SBI stock citing the benefits from relaxation in provision norms. Amongst the large banks, SBI has the lowest provision coverage ratio.
The BRICS analysts note:
With change in provisioning policy, we expect SBI’s PCR to be 70-75% for Q4FY11E. We estimate around Rs 5 (10%) upside to Q4FY11 EPS estimate from exclusion of ‘catch up’ provisioning, and Rs 10 in FY12E. While this is a meaningful positive for SBI, implementation of ninth bipartite pension settlement remains key headwind to earnings.
The latest move will be further clear the clouds on the SBI financials. SBI, under its previous chairman O.P. Bhatt, for sometime had refused to increase provisions for home loans given under teaser rates scheme.