Tight norms to hit bank profits: Moody’s

The Reserve Bank of India (RBI) tightened banks’ provisioning requirements,increasing them to 1 percent from 0.4 percent for loans related to commercial real-estate classified as standard.

The RBI also set up a minimum of 70 for the banks’ non-performing loans (NPL) provision cover ratios to be met by September 2010.

Moody’s said these measures suggest that the RBI is worried about a potential increase in bad loans,particularly given the significant build-up of restructured loans and in view of the large increase in credit to the commercial real estate sector over the last year.

While these measures will increase banks’ buffer to absorb eventual loan losses,higher credit costs could dent their bottom lines,it said.

In some cases where this ratio is currently around or even less than 50 percent,the short-term impact on profits could be significant,as there is less than a year to comply with the 70 percent requirement,it added.

The Reserve Bank of India will soon issue guidelines on meeting provisioning rules and some banks have sought time to meet them,its deputy governor Shyamala Gopinath said on Friday.

Moody’s also said in the note that the Reserve Bank’s decision to keep its key rates unchanged at the policy review and a hike in the proportion of deposits banks have to invest in approved government securities will have no short-term credit implications for banks.