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Will higher provisions put pressure on bank profits?

Created by : Jyoti Rath, Sr. Associate, Barclays  | 11 07 2009 12:51:19 +0000
Industry : Investment BankingFunctional Area : Growth(Strategy & Execution)
Keywords : rbi sbi provisions fiscal year bank profits
Activity:  194 views;  last activity : 07 06 2010 20:18:09 +0000

Dear friends, the Rating agency Standard & Poor’s has said that banks’ profitability will be suppressed in fiscal year 2010 and fiscal year 2011 as they have set aside profits to comply with the higher provision levels. The impact on profitability may be subdued if RBI extends the September 2010 deadline or if it allows banks to include technical loan write-offs as part of provisions. In the recent credit policy the RBI asked banks to maintain PCR of at least 70% by September 10. Until the policy, RBI had not stipulated any minimum ratio. Many banks have urged RBI to extend the deadline by one more year.

SBI will need to set aside Rs 5,000 crore to meet the stipulated PCR of 70%. Its PCR on September 2009 had improved to 42.8%. The industry average on PCR is 52%. Banks have asked RBI to extend the deadline on implementing IFRS. The RBI has asked banks to move towards International Financial Reporting Standards (IFRS) by 2011 — an accounting policy which will require banks to put in place core banking solutions for their entire network. RBI has to yet issue guideline on IFRS for banks and based on the guidelines banks will frame IT solution.

So friends, do you think this higher provision will put any pressure on bank profits?

  
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Yes it will reduce the profits of the banks. When these restrictions are implemented, all the banks have to put in place core banking solutions for their entire network which may result in a loss for them....
By Jyoti Rath, Sr. Associate, Barclays  11 07 2009 12:51:19 +0000
 
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yes i also agree with other as more provisions will reduce the loan disbursement and will effect the banks profitability in term of loans.Moreover at present time also banks are very much skeptical regarding the loans.they are still concerned more about quality of loan which have forced the market to go for other routes to raise funds.Banks higher allocation will results to loss of profitability.
By INDRANEEL SEN GUPTS, Security/ Equity Research Analyst, ianalysis.com  | 11 13 2009 04:38:27 +0000
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yes i also agree with other as more provisions will reduce the loan disbursement and will effect the banks profitability in term of loans.Moreover at present time also banks are very much skeptical regarding the loans.they are still concerned more about quality of loan which have forced the market to go for other routes to raise funds.Banks higher allocation will results to loss of profitability.
By INDRANEEL SEN GUPTS, Security/ Equity Research Analyst, ianalysis.com  | 11 13 2009 04:38:08 +0000
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yes i also agree with other as more provisions will reduce the loan disbursement and will effect the banks profitability in term of loans.Moreover at present time also banks are very much skeptical regarding the loans.they are still concerned more about quality of loan which have forced the market to go for other routes to raise funds.Banks higher allocation will results to loss of profitability.
By INDRANEEL SEN GUPTS, Security/ Equity Research Analyst, ianalysis.com  | 11 13 2009 04:37:14 +0000
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As it is banks are working on thin margins and increase in provisions/higher provisions will affect the bank's profits very adversely.
By kanukurthy sudershanrao, Operations Manager, Andhra Bank  | 11 09 2009 18:20:54 +0000
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HIGHER PROVISIONING WILL DEFINITELY DECREASE PROFITABILITY ESPECIALLY WITH IMPLEMENTATION OF IFRS BY 2011
By VINAY BUSHAN. S, Head/VP/GM-Accounts, SUNDHARAMS PVT LTD  | 11 09 2009 12:56:16 +0000
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Provision in profit and loss account of a banking company shall always be a charge on the profits of the company, I mean to say that will defenitly reduce the profit of the enterprise. It will have negetive impact on the profit. Further, implementation of IFRS may not be adversly effected on the company but its only a change in financial reporting standered, effect may be on either side depending on the accounting policy adopted for each and every item in the financial statement drawn till the date of change. Most of the worl countries are alredy accepted IFRS and India too decided to adopt the same from the year 2011.


By RAMANATHA PRABHU N, Chartered Accountant  | 11 09 2009 09:14:29 +0000
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Credit offtake now is low for Indian Banks, since dollar denominated credit is cheaper from abroad. This may be the reason Bank preformance is going to be affected not Provisions for defaults. Moreover our Banks do only nut and bolt banking meaning they don't have anyother way of raising revenue. So when their main cashflow line is diminished then there is no place else to go to compensate for it. Increasing PCR, they might be required to pass on some of their accumulated savings to RBI or keep in provisions or invest in reverse repo.


By Mathew Cherian, Research Associate/Analyst, Western Michigan University  | 11 09 2009 18:05:03 +0000
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I don't think it will have any effect on the banks since RASP are giving a condition to them that if RBI extends the September 2010 deadline or if it allows banks to include technical loan write-offs as part of provisions, the impact on profitability may be subdued....
By Swati Raut, Product Manager, Aviva  | 11 07 2009 12:53:22 +0000
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