Banks profits to be hit after RBI move

The Reserve Bank of India on Tuesday asked banks to increase the minimum provision ratio for bad debts to 70 percent from 10 percent by September 2010.

The move was proposed to improve the provisioning cover and enhancing the soundness of individual banks,it said.

“The banks have been hit,well ahead of expectations,” Citigroup analyst Aditya Narain said in the note. “These measures were unexpected and largely negative for earnings,although a little less so for value.”

Nomura in a research report estimates State Bank’s provision shortfall as a result of the rule change at 28.9 billion rupees ($614 million) and ICICI Bank’s at 13.6 billion rupees,which would have an impact of 46 rupees on State Bank’s share and 12 rupees on ICICI’s.

Shares in State Bank had their biggest fall in 10 weeks,and ICICI saw its worst single-day fall in more than 3½ months on Tuesday.

Private sector lenders Axis Bank and HDFC Bank,which already have high provision coverage,would not be hurt,analysts said.