PSBs' profits would have been wiped out were they asked to maintain 70% PCR

Thanks to RBI, which had withdrawn the requirement for 70% loan loss cover from September 2011. Else, Public sector banks, which have decreased their PCR (Provision Coverage Ratio) in the last one year, would have seen their quarterly profits wiped out, were they asked to maintain PCR of 70%.

• It is interesting to note that although, RBI had withdrawn the requirement for 70% loan loss cover from September 2011, private sector banks, whose asset quality is better than their public sector counterparts’, have maintained provision covers of more than 70%.
• Except a few exceptions, majority of PSBs (Public Sector Banks) have reported a sequential decrease in their PCR, while private sector banks have performed better.

Source: Business Standard

Clearly from the table, we can see that SBI’s quarterly Net Profit was 3,658.14 Crores and its PCR was 62.80% and in case it was to maintain PCR of 70%, SBI would have almost wiped out its quarterly profit.
Now, if we analyze the case of Indian Overseas Bank, it has a quarterly net profit of Rs 158.43 Crores. Were it asked to maintain PCR of 70%, then Indian Overseas Bank would have needed 680 Crores i.e. 4.3 times more than its net profit.
The country’s top private sector banks ICICI Bank and HDFC Bank had a PCR of 78.7% and 82%, respectively, at the end of the September quarter.
What is Provision Coverage Ratio (PCR) ?

• PCR is the ratio of provision to gross non-performing assets (NPAs).
• A key relationship in analyzing asset quality of the bank.
• A measure that indicates the extent to which the bank has provided against the troubled part of its loan portfolio.
• A high ratio suggests that additional provisions to be made by the bank in the coming years would be relatively low (if gross NPAs do not rise at a faster clip).
• Thus, PCR refers to the percentage of the loan amount that the bank has set aside as provisions to meet an eventuality where the loan might have to be written off it becomes irrecoverable.
• It is a measure that indicates the extent to which the bank has provided (set aside money to bear the loss) against the troubled part of its loan portfolio.
• PCR  = Cumulative provisions / Gross NPAs

Thus, more the NPAs lesser will be the PCR.

Month: Current Affairs - November, 2012