Money & Banking

Provisioning hike will hit banks’ profitability

The requirement of higher provisioning for banks, is likely to take a toll on their profitability in the near-term. Reserve Bank of India has hiked the amount required to be set aside for restructured loans from 2 per cent to 2.75 per cent.

But what banks may lose in the form of higher provisioning, may be made good by the decrease in the cash reserve ratio requirement.

PSU banks face brunt

Based on the restructured loans outstanding as of June 2012, Rs 21,00 crore may be shaved off from profits . Predictably, public sector banks which have 6.7 per cent of their loans as standard restructured assets are likely to be the worst hit. New private banks may require lowest provisioning. Punjab National Bank, Oriental Bank of Commerce, Indian Bank, Allahabad Bank, Indian Overseas Bank and Andhra Bank have a high proportion of restructured loans.

CRR cut to benefit banks

The liquidity situation of banks will improve with Rs 17,500 crore of additional liquidity released due to cut in the reserve requirement. With release of liquidity, the net interest margins for banks will improve by at least 3.5 basis points (annualised).

The deposits released can be deployed at around 8 per cent (government bond rate). Also, given that they now have additional liquidity, to that extent, banks need not borrow money from the repo window or call market and will be save on interest expenses .


Published on October 30, 2012

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