banks: Small banks may need to boost provisioning: Analysts

Mumbai: The likely shift to provisioning based on expected losses from incurred losses could be cumbersome for some public sector and regional private sector banks, according to analysts.

Even as most banks have strengthened capital buffers post Covid-19, expected credit loss (ECL)-based norms could release existing provisioning for large banks such as ICICI Bank and

, they said, while some small private players like and DCB Bank may have to accelerate provision buffers and raise capital faster.

“Given that the Covid shock is largely behind and with banks sitting on healthy provision buffers, we believe now is an opportune time to introduce ECL norms for banks and strengthen their provision buffers, before the next asset-quality shock,” said Anand Dama, analyst,

. “We believe ECL-based norms could release provisioning for some large banks like ICICI, Axis, and with strong specific and contingent buffers, while some small private banks like City Union Bank, DCB and Equitas may have to accelerate provision buffers and even replenish capital levels faster than planned.”

The Reserve Bank of India (RBI) on Monday floated a discussion paper proposing a move towards expected loss-based provisioning for banks. In the current incurred approach, banks make provisions 90 days after a loan becomes due. As per the formula, 15% provisioning is required on secured assets while 25% is needed for unsecured assets.

Under the proposed ECL method, stage 1-stage 3 assets are identified based on the overdue position of loans and provisions are made based on that. The model factors in probability of default, loss-given default and exposure at default, recognising the problems earlier and making the system more resilient in the long run.

“The ECL framework, though initially tough on the balance sheet and P&L of banks, in the long run strengthens the banking system,” said Suresh Ganapathy, associate director, Macquarie Capital. “The RBI is doing so at a time when the health of the banking system is the best. The impact could be felt in FY26 accounts and banks will have to start preparing in FY25 to raise capital in our view. The problem here is that in the last 5-10 years the probability of default has been very high for the banking sector and that’s why eventual ECL provisions could be higher.”

According to a Jefferies report, in the past two years banks have ramped up their provision coverage ratio to 70-80% of total bad loans. The brokerage house said that loss on account of default on bad loans in the past 10 years was 55-60% for private banks and 60-65% for state-run banks. Jefferies estimates that banks may need to build provisions for stressed loans other than non-performing loans such as SMA1 (30 days past due) and SMA2 (60 days past due).

Mumbai: The likely shift to provisioning based on expected losses from incurred losses could be cumbersome for some public sector and regional private sector banks, according to analysts.

Even as most banks have strengthened capital buffers post Covid-19, expected credit loss (ECL)-based norms could release existing provisioning for large banks such as ICICI Bank and

, they said, while some small private players like and DCB Bank may have to accelerate provision buffers and raise capital faster.

“Given that the Covid shock is largely behind and with banks sitting on healthy provision buffers, we believe now is an opportune time to introduce ECL norms for banks and strengthen their provision buffers, before the next asset-quality shock,” said Anand Dama, analyst,

. “We believe ECL-based norms could release provisioning for some large banks like ICICI, Axis, and with strong specific and contingent buffers, while some small private banks like City Union Bank, DCB and Equitas may have to accelerate provision buffers and even replenish capital levels faster than planned.”

The Reserve Bank of India (RBI) on Monday floated a discussion paper proposing a move towards expected loss-based provisioning for banks. In the current incurred approach, banks make provisions 90 days after a loan becomes due. As per the formula, 15% provisioning is required on secured assets while 25% is needed for unsecured assets.

Under the proposed ECL method, stage 1-stage 3 assets are identified based on the overdue position of loans and provisions are made based on that. The model factors in probability of default, loss-given default and exposure at default, recognising the problems earlier and making the system more resilient in the long run.

“The ECL framework, though initially tough on the balance sheet and P&L of banks, in the long run strengthens the banking system,” said Suresh Ganapathy, associate director, Macquarie Capital. “The RBI is doing so at a time when the health of the banking system is the best. The impact could be felt in FY26 accounts and banks will have to start preparing in FY25 to raise capital in our view. The problem here is that in the last 5-10 years the probability of default has been very high for the banking sector and that’s why eventual ECL provisions could be higher.”

According to a Jefferies report, in the past two years banks have ramped up their provision coverage ratio to 70-80% of total bad loans. The brokerage house said that loss on account of default on bad loans in the past 10 years was 55-60% for private banks and 60-65% for state-run banks. Jefferies estimates that banks may need to build provisions for stressed loans other than non-performing loans such as SMA1 (30 days past due) and SMA2 (60 days past due).