'Banks may not be able to meet credit growth forecast now'

The Reserve Bank of India (RBI) today raised banks' provisioning requirement to 2.75% as against the existing 2% on restructured standard loan accounts. Most banking stocks tumbled post this announcement as higher provisions would eat away their profits.

Hemindra Hazari of Nirmal Bang told CNBC-TV18 that the impact of this move on the profits of state owned lenders like Canara Bank and State Bank of India this year would be to the extent of 6.5% and 2% respectively. "In our universe, Canara Bank has high restructured standard loans, so it should have the largest hit," he added. Bankers expect asset quality to worsen and this rise in provisioning will add to the pressure on their profitability, he informed. Hazari expects credit growth of banks to decelerate due to sluggish demand and feels that it would be difficult for banks to meet earlier credit growth forecast. Below is an edited transcript of Girish Agarwal's interview on CNBC-TV18. Q: We have seen Bank of Baroda and Punjab National Bank taking it on the chin. Which banks would you worry about because of the new restructured provisioning norms? A: The bank which has a high restructured standard loan is Canara Bank. We expect the impact on their profits this year to be about 6.5%. We are also expecting it to impact other banks like Bank of India, Bank of Baroda and Punjab National Bank. For State Bank of India, we are expecting profits to be impacted by 2% or so. So in our PSU banking universe, Canara Bank should have the largest hit. Q: How high would be the impact on banks like PNB and Bank of Baroda in your initial calculations? A: In our initial calculations, we are looking at PNB in FY13 to about Rs 200 crore, Bank of Baroda about Rs 160 crore while for Bank of India about Rs 470 crore. All these banks have very large restructured standard loans. Some of the banks, bankers that I spoke to were a little disappointed because they were saying that asset quality is not only bad, but it is expected to worsen. In such a case, if RBI is going to tighten the norms, it is going to put further pressure on their profitability. So, although this was expected as RBI wanted to take this to about 5%, they are a little concerned that at such a time RBI should be the norms for them. Q: What would be the impact of the policy on any housing finance company because the governor has tweaked some of them including the priority sector lending? A: Unfortunately, at this time we don’t have coverage on any of the housing finance companies. Q: Considering that more money will have to be kept aside for provisioning do you think we are going to see a big damage to even the volume of lending? The RBI has given an overall forecast of 16%, but do you think for the public sector banks even 16% credit growth is going to be difficult? A: In my view, the credit growth will decelerate because that is the function of the way the demand is in the economy. We expect the demand to slowdown. I don’t see how the earlier forecast for credit growth would hold. Also, because of this higher provisioning, banks would be reluctant to see any margin compression. Banks would now need any type of profit not only from their incremental bad debts but because of the tightening of the norm. So, one is expecting banks to tighten their margins in such a situation. Banks would be really forward to pull out profits from any avenue possible.