The mandatory 70% provisioning coverage expected to be implemented by banks has created quite a stir in the banking community

The major bone of contention emerging among Indian banks is the provisioning requirement mandated by the country’s central bank, the Reserve Bank of India (RBI) in its last monetary policy review. RBI had advised banks to maintain a loan loss provisioning ratio of at least 70% by September 2010. While most see this demand as too harsh and steep, there are some who welcome the move as a step in the right direction.

The difference in opinion was quite apparent at Monday’s Banking Conclave held by State Bank of India (SBI) and Indian Banks’ Association (IBA) in Mumbai. The issue was discussed at length by luminaries of the financial world. SBI chairman OP Bhatt pointed out some of his reservations against the new norm. He said that although RBI was rightly concerned about the health of the Indian banking system, the reasoning behind arriving at the number (70%) was a bit odd.
“Earlier the provisioning was fixed separately for the category of asset being provided for. However, the new requirement mandates banks to provide 70% across the total non-performing loans. If this number had come from similar logic, it would have been better. I feel a lot more understanding is required in this area. Some banks would definitely find it challenging to meet this criterion and hence, would need more time. The provisioning requirement should be based on some kind of formula,” he said.

However, Rana Kapoor, chief executive of Yes Bank, had a different perspective. “In a heightened risk environment since the last couple of years, which has still not been entirely mitigated, the risks in the system are still running high. I feel this is a proactive measure by RBI to send a signal. The timeframe could be somewhat flexible, but I think it is very important that the asset quality continues to be ranked on priority. Banks should administer proactive and dynamic provisioning policies, in advance of assets turning non-performing,” he said.

Mr Kapoor’s emphasis on asset quality highlighted Mr Bhatt’s own remarks on the current level of NPAs in the banking system. Mr Bhatt, while mentioning the concerns facing the industry, had pointed out that NPAs were running high and that they would continue to rise at least for the next couple of quarters.