70% loss cover would have wiped out PSBs' profits

Last Updated: Thu, Nov 15, 2012 19:40 hrs

Public sector banks, which have lowered their provision coverage ratios in the last one year, would have seen their quarterly profits wiped out, had they maintained provision coverage ratios of 70 per cent.

Provision coverage ratio is the ratio of provision to gross non-performing assets (NPAs).

Though the Reserve Bank of India (RBI) had withdrawn the requirement for 70 per cent loan loss cover from September 2011, private sector banks, whose asset quality is better than their public sector counterparts’, have maintained provision covers of more than 70 per cent.

State Bank of India (SBI), the country’s largest lender, reduced its provisioning for bad loans from 68 per cent as of March-end to 62.8 per cent at the end of September. To maintain a provision coverage ratio of 70 per cent, SBI would need additional provisioning of Rs 3,552 crore, close to its net profit for the quarter ended September.

The situation is graver for smaller banks. Chennai-based Indian Overseas Bank, which posted a net profit of Rs 158 crore for the quarter ended September, would require Rs 680 crore to raise its provision coverage ratio to 70 per cent, against 58.53 per cent at the end of September.

For the quarter ended September, most public sector banks reported provision coverage ratios of less than 70 per cent. Among the major government-owned lenders, Bank of Baroda’s provision cover was the highest at the end of September (75.72 per cent). In the year-ago period, the bank’s provision coverage ratio stood at 82 per cent.

According to RBI data, the provision coverage ratios for public sector banks stood at 47.6 per cent as of March-end, compared with 49 per cent a year earlier.

For private sector lenders, the ratio was 74.9 per cent, compared with 74 per cent during the corresponding period last year.

To maintain profitability, public sector banks, which are facing more pressure on asset quality than private sector banks, had to cut overall provisioning. RBI data shows gross NPAs for public sector banks increased to 3.3 per cent as of March-end, against 2.4 per cent a year earlier. For private lenders, the ratio declined from 2.5 per cent to 2.1 per cent during the same period.

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