Higher provisioning on loan recast is credit positive: Moody's

MUMBAI: Moody's Investor Service has said that Reserve Bank's decision to impose higher provisions on restructured loans will strengthen Indian banks loss absorption capacity and it would be credit positive.

Last week, RBI raised the provisionson loan that are restructured from 2% to 2.75% - a move that was termed as unpleasant surprise by chairman of Indian Banks' Association and CMD of Punjab National Bank, K R Kamath. Although the Mahapatra committee report on debt restructuring had proposed a higher provision of 5% on loan recast, it had suggested that RBI should not implement it immediately due to stress in the economy.

Moody's said that the move would give bank management's incentive to improve their loan underwriting standards which in turn would strengthen asset quality. The rating company has noted, "Although a significant portion of restructured loans have turned into non-performing loans over time, they are subject to significantly less stringent provisioning and reporting requirements."

The restructured loans classified as standard rose from Rs 75304 crore in March 2009 to Rs 218068 crore in March 2012. Public sector banks are mostly likely to be affected by higher provisioning requirement. Moody's report says that 6-10% their total loans books is restructured portfolio.