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Banking stocks fall on RBI’s mandate for higher provisioning

LiveMint logoLiveMint 27-06-2017 Ravindra N. Sonavane

Mumbai: Banking stocks fell on Tuesday as investors were concerned over a news report which said that the Reserve Bank of India (RBI) has directed banks to keep higher provisions against all cases referred for bankruptcy proceedings.

Punjab National Bank fell 4.1%, Corporation Bank 3.8%, Bank of Baroda 3.6%, Canara Bank 3.5%, Andhra Bank 3.1%, Allahabad Bank 3%, Union Bank of India 3%, Oriental Bank of Commerce 2.8%, Axis Bank 2.7%, State Bank of India 2.6% and ICICI Bank was down 1.5%.

BSE Bankex Index fell 1%, while India’s benchmark Sensex index fell 0.3% to 31,044.43 points.

Analysts believe that higher provisioning may further impact the profitability of banks, which are already struggling under mounting non-performing assets (NPAs).

In a communication sent late on Friday evening, the central bank told banks to set aside 50% of the loan amount as likely losses for all cases referred to the National Company Law Tribunal (NCLT), Economic Times reported on Monday.

According to study by CRISIL, banks have already provisioned 40% for these NPAs worth Rs2 trillion or equal to a quarter of the NPAs in the banking system, before the RBI’s move.

“Based on our assessment of embedded value in the top 50 NPA cases, we estimate a 60% haircut would be needed on these loan assets. That would mean banks will have to increase provisioning by another 25% this fiscal compared with 9% in the last,” said Krishnan Sitaraman, senior director of Crisil ratings in a 26 June report.

The RBI recently referred 12 large NPAs in the banking system for resolution under the Insolvency and Bankruptcy Code based on the recommendations of its internal advisory committee. A time-bound resolution of these cases will indeed be a big positive for bank balance sheets.

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