Experts analyze impact of new provisioning norms on banks

The Reserve Bank of India (RBI) relaxed the provisioning norms for banks with retrospective effect from September 30, 2010, which in turn could help banks post higher profits.

The RBI said, banks will have to maintain a provision coverage ratio (PCR) of 70% of their gross bad loans only till September 30, 2010 after which they will have to follow just the standard capital provisioning requirement as per by the Basu committee. In an interview with CNBC-TV18, Haseeb Drabu, Economist and Vaibhav Agarwal, Angel Broking, speak about the new provisioning norms and give their outlook going forward. Also read: RBI relaxes provisioning norms for banks Below is a transcript of their interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos. Q: Have you done some sensitivity analysis on which public sector banks could be the most benefitted in terms of earnings upgrades because of the change in the PCR? Agarwal: I think as far as the change in PCR is concerned, generally the banking sector had started seeing an improvement in asset quality. So, several of the banks would not benefit from this because in a sense they were already anyways seeing a declining in their provisioning requirements. However, there are some number of banks, which were seeing incremental asset quality pressures and were expected to continue seeing them. These include banks like Punjab National Bank (PNB), Oriental Bank of Commerce (OBC), on the South side Canara Bank, Vijaya Bank, Andhra Bank. However, in case of these banks if they use this to provide less, we would not be very positive about that. We would anyways reduce those non-performing assets (NPAs) from their networth, while calculating their target prices. However, there are certain number of banks, the main one being State Bank of India (SBI) where there was an unofficial burden because of the provisioning requirement. I think in case of SBI, it will definitely give them some leeway to manage their earnings visibility going forward. Over there, we do see some amount of relief coming in. We are building in about 33% earnings growth for SBI in FY12.  Q: What did you have penciled in terms of provisioning that SBI would have had to do and now may get some relief on? Agarwal: We were, for FY12, building an above Rs 7,800 crore of provisioning requirement, which took into account 70% provisioning even on their incremental NPAs, which we expect to be after recoveries and upgrades about Rs 10,000 crore. But if you look at loss rates for the banks over the last ten years, they see about 50% loss rate out of their NPAs. So, compared to the 70% provisioning requirement and 50% loss rate, if they end up somewhere in between they can clearly save about somewhere around Rs 700-1,000 crore atleast in terms of their provisioning burden for FY12. Q: The RBI circular states that this is where things stand, until the RBI introduces a more comprehensive system of provisioning, how do you think it will work? Drabu: I think to start with, it is completely arbitrary and ad hoc. To the extent that RBI says this is only transition, it is in some ways the admission that it is ad hoc. I think there are multiple reasons as to why RBI is doing this. I don