The RBI's move to tighten credit flow to commercial real estate and non-performing loans by raising provisioning requirements in its policy review last month would hurt the profits of banks in the short run, global credit rating agency Moody's said today.
"The hike in RBI's provisioning requirements is likely to have a significant impact on profits over the short term, especially for those banks that currently have relatively low NPL provision cover ratios," Moody's said.
The RBI, keeping key policy rates unchanged in its policy review last month, raised the provisioning requirements for the loans to commercial real estate, and banks' non-performing loans.
The RBI increased provisioning requirement to 1 per cent from 0.4 per cent for loans to the commercial real estate sector and also set up a minimum of 70 per cent for the banks' NPL provision cover ratios to be met by September 2010.
"Higher provisioning will increase rated Indian banks' buffer to absorb loan losses and has positive credit implications. But the higher credit costs are likely to dent bottom lines," the agency said in a statement.
In cases where the provision cover ratio is currently around or even less than 50 per cent, the short-term impact on profits could be significant, as there is less than a year to comply with the 70 per cent requirement, it said.
However, Moody's said, the unchanged rates and higher Statutory Liquidty Ratio (the amount banks keep in government securities, cash, and gold), which was raised by 1 percentage point to 25 per cent, would have no short-term credit implications for rated Indian banks.
