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BL Research Bureau The RBI’s Credit Policy has proved to be much more hawkish than what market watchers expected.

While the policy rates and Cash Reserve Ratio were kept unchanged, Statutory Liquidity Ratio (SLR) was hiked by one percentage point to 25 per cent. The hike doesn’t significantly impact banks as their current aggregate SLR investment-deposit ratio is 33 per cent, including reverse repo securities. The RBI also discontinued the special repo windows for forex swaps, mutual funds and non-banking finance companies given the easy liquidity conditions.

The fineprint shows that the RBI has not only revised the WPI inflation target upwards by 1.5 percentage points, but also started to reverse certain stimulus measures. The increase in standard asset provisioning on real estate advances and mandating a 70 per cent provision coverage for the banks by September 2010 are moves in this direction.

The stipulation for higher provision coverage may catch many of the banks off guard.

While banks were adhering to the asset classification and provisioning norms stipulated by the RBI, the central bank seems to be taking a conservative view by mandating a higher provision cover of 70 per cent, especially when banks have significant proportion of their assets restructured.

Larger banks such as SBI, ICICI Bank, Canara Bank, IDBI Bank, UCO Bank and Indian Overseas Bank may have to set aside higher amounts of funds to lift their provision coverage to 70 per cent.

The good news is that the provision coverage can include the floating provisions, which banks such as Union Bank India could utilise.

Higher coverage may significantly affect the profitability of the banks. For instance, if the current provision coverage of ICICI Bank and SBI has to improve to 70 per cent, they have may have to take a hit of 1.6 and 2 times of their respective June quarter’s profits over the next year.

Despite no changes to the risk-weights on lending to commercial real estate, higher requirements for standard provisions against commercial real estate advances may discourage banks from lending or may force them to lend at a higher rate.

Axis Bank, which has a fund exposure of 7.5 per cent of total advances to the commercial real estate, may have to set aside an additional one-time Rs 35 crore for standard asset provisions. That forms 7 per cent of the previous quarter’s earnings. Banks with higher exposure to realty – such as Indian Bank – may have to set aside a relatively higher provision.

With the central bank revising the credit growth target to 18 per cent from 20 per cent for the year, banks also need to worry about muted credit offtake. Possible monetary tightening by RBI to deal with inflows of liquidity is also a risk. The fear of Government bonds crowding out the corporate credit have been allayed with only Rs 62,464 crore of additional borrowing required for the year.

More Stories on : Credit Policy | Stock Markets

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