Stricter norms to lower banks’ profits: Moody
By Vaibhav Aggarwal
Nov 4, 2009
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Rating Agency Moody said that the Reserve banks stricter norms regarding provisions for non performing loans and for loans to realty sector would decrease the banks' profits. Moody's said that the increase in provisioning requirement was expected to have a significant impact on short term profits.

In its quarterly policy review on October 27, RBI did not tweak the key rates but asked the banks to increase provisioning requirements for NPAs that is the amount of funds banks are required to keep aside for possible losses.

The apex bank has directed the banks to maintain 70 percent of their non performing assets as a cushion against likely losses. Moody's said, "Higher provisioning will increase rated Indian banks' buffer to absorb loan losses ... But the higher credit costs are likely to dent bottom lines." The Rating Agency said that increase in provisioning requirements indicates that RBI is worried about increase in bad loans.

RBI raised provisioning requirement from 0.4 percent to 1 percent to commercial real estate sector, resulting in a 150% increase.

The agency said that unaltered key rates and a hike in Statutory Liquidity Ratio would not have any short-term credit implications as most banks have SLR holdings above 27 percent. SLR is the portion of total deposits that banks have to maintain in form of government securities.

Moody's said that profits for banks having low provisions for bad loans could decrease as they have less than a year to comply this RBI norm.


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