impact on banks' profits over the short term

Mumbai: Tighter provisioning norms announced by the Reserve
Bank in its policy review last week could have a significant
impact on banks' profits over the short term, Moody's said
in a note on Monday.

Banks with a low provision cover ratio combined with
low core Tier 1 capital could face a downward
rating pressure, it added.

The Reserve Bank of India (RBI) tightened banks' provisioning
requirements, increasing them to 1 percent from 0.4 percent for
loans related to commercial real-estate classified as standard.

The RBI also set up a minimum of 70 for the banks'
non-performing loans (NPL) provision cover ratios to
be met by September 2010.

Moody's said these measures suggest that the RBI is worried
about a potential increase in bad loans, particularly given the
significant build-up of restructured loans and in view of the large
increase in credit to the commercial real estate sector
over the last year.

While these measures will increase banks' buffer to absorb
eventual loan losses, higher credit costs could dent their
bottom lines, it said.

In some cases where this ratio is currently around or even less
than 50 percent, the short-term impact on profits could be
significant, as there is less than a year to comply with the
70 percent requirement, it added.

The Reserve Bank of India will soon issue guidelines on
meeting provisioning rules and some banks have sought
time to meet them,
its deputy governor Shyamala Gopinath said on Friday.

Moody's also said in the note that the Reserve Bank's
decision to keep its key rates unchanged at the policy
review and a hike in the proportion of deposits banks have
to invest in approved government securities will have no
short-term credit implications for banks.