Ind-AS to crimp public sector banks’ growth due to higher provisioning

Public sector banks would need to divert an estimated Rs 63,000 cr, or about 41% of the total money that the government has promised, to meet increased provisioning requirements for loans under the new Ind-AS accounting standard, India Ratings said, adding that this would ‘knock down’ their growth aspirations and hurt market share.

Provisioning refers to the practice of keeping money aside to cover for possible defaults on loans.

India Ratings said the higher provisioning requirements would suck out a large chunk of the 1.53 lakh cr government has promised the banks to help them tide over a bad loan crisis.

“Assuming Ind-AS is implemented from 1 April 2018, close to 41% of announced recapitalisation funds would be consumed towards incremental provisioning requirements, putting pressure on PSB’s ability to meet the regulatory core equity tier 1 capital under Basel III framework,” the credit rating agency said.

“This could increase the pace of portfolio churn and credit market shift towards private sector banks, and partly towards wholesale non-banking finance companies.”

It said that the Rs 63,100 cr of extra provisioning required from public sector banks is equivalent to an equity write-down of 1.10% of the banks’ risk weighted assets and 11.5% of net worth at end-March 2017..

“Private sector banks would also need a whopping Rs 258 billion; however, their higher capitalisation would enable a smooth transition,” it added.


The reason for all this is the tighter provisioning requirements contained in the new accounting standards.

Banks are expected to move to Ind-AS from April this year. Most of the other companies have already moved to the new standard.

Under the present accounting system, also known as Indian GAAP, stressed assets — also known as ‘stage 3’ assets — have to be accounted for by making provisions that are equal to 5% of the value of the advances.

However, under the stricter Ind-AS norms, banks to have to cover their exposure to such loans by 50%. The extra 45% must be allocated when they move from GAAP system to Ind-AS.

The higher provisioning for such ‘stage 3’ assets is expected to cost Rs 72,900 cr. Out of this, Rs 51,000 cr would fall on public sector banks and Rs 21,900 cr on private banks, India Rating said.

Even ‘stage 2’ or regular loans will require higher provisioning of 7.5% under Ind-AS against 0.4% under GAAP, India Ratings pointed out.

This will result in extra requirement of Rs 16,000 cr, out of which public sector banks have to bear Rs 12,100 cr.


Loan growth in India has been on the decline in recent years after bad bets by banks on unviable industrial projects led to a rise in non-performing assets or bad loans. However, public sector banks’ loan disbursement growth started looking up in the year-ended March 2017.

In FY17, public sector banks were able to report loan growth of 8%, and were aiming even higher this year.

However, said India Ratings, expectations have to be tempered given the higher provisioning requirements.

“The quantum of the government’s proposed capital injection in PSBs, together with the banks’ proposed mobilisation of capital, should largely cover the provisioning shortfall for their stressed assets. The capital can also support modest growth (around 7%) in advances,” it said.