Net NPAs of most banks will rise because of the effect of a recent circular by the Reserve Bank of India, that has taken most bankers by surprise. In the circular issued a few days ago, the RBI disallowed banks the option of using excess provisions (floating provision) to set off against gross NPAs, thus denying them a means of showing a lesser net NPA level in their balance sheets. Earlier, the banks had this option. Conversely, they could take the floating provision to Tier-II capital. Now, the option is not there — banks will necessarily have to take floating provision amount to Tier-II capital. In effect, the excess provisions will be treated like retained earnings. One banker said that the circular would have the effect of raising net NPAs of banks by anywhere between 20 and 50 basis points. Different banks have different amounts as floating provisions and hence they would be affected differently. For example, published figures show that Indian Bank has Rs 92 crore of floating provisions. The bank may be an outlier, the impact may not be much. Net NPA may go up by about 15 basis points. Indian Overseas Bank has about Rs 170 crore and the impact may be about 25-30 basis points. The private sector City Union Bank has Rs 19 crore of floating provisions. The impact may be about 30 basis points. All the bankers that Business Line spoke to, said on conditions of anonymity that the circular is a big let down by the RBI. Most banks are adequately capitalised and hence the positive impact on capital adequacy is estimated to be negligible. On the other hand, bankers delight in showing low net NPA levels. Many bankers gave vent to their feelings more on the point of principle — there was no consultation by the RBI, the circular came out of the blue. Nor has any reason been given. |
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