Higher provisioning for CDR makes banks cautious on new recast proposals

A higher provisioning means banks’ profits will be hit

Written by ENS Economic Bureau | Mumbai | Published: April 4, 2013 12:51:47 am

After restructuring loans worth Rs 70,000 crore in calendar 2012,banks are taking now a cautious view of corporate debt restructuring (CDR) proposals of big and medium borrowers as they will have to make a higher provisioning of 5 per cent as against the earlier level of 2.75 per cent with effect from April 2013.

“A higher provisioning means banks’ profits will be hit. The legacy of weak asset quality will still continue to haunt some of the banks. On the whole,the loan revamp exercise is slated to come down gradually in the next one year,” said the chief of a nationalised bank.

“Large slippages and restructuring have impacted the solvency of banks as net NPAs in relation to networth increased from 13.5 per cent to 23 per cent during this period (March 2011-September 2012). In the short term,asset quality is likely to remain challenging for public sector banks. However,I expect asset quality related pressures to ease over medium term. The expectation is based on the view that the economic environment would show improvement,going forward,while the structural issues confronting the power sector would see some resolution,” said ICRA chairman and group CEO PK Choudhury.

Crisil had estimated that the banking sector’s provisioning requirement by Rs 15,000 crore between April 2013 and March 2015,bringing down the banks’ profits by around 7 per cent for this period.

The CDR cell of banks has approved restructuring of 362 loan accounts worth Rs 2,11,978 crore as on December 31,2012,as against Rs 1,42,525 crore in December 2011. Of this iron & steel sector tops the list with restructuring of Rs 47,138 crore loans,accounting for 23.11 per cent of the total CDR cases. Infrastructure is second with Rs 19,737 crore CDR cases.

The latest hike came three months after the RBI raised provisioning on restructured accounts to 2.75 per cent to 2 per cent in 2012 to mitigate risk attached with such loans,especially against the backdrop of a long queue of big borrowers to restructure their accounts.

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