RBI gives lenders more flexibility to cover bad loans

Banks can now divert as provision against bad loans a bigger share of the capital cushion required to be set aside to guard themselves against an economic downturn, the Reserve Bank of India said on Monday, easing pressure on a struggling sector.

India currently mandates that banks set aside funds for emergency use in a so-called counter cyclical capital buffer.

Up to half that buffer, held as of Dec 31, can now be used for provision against bad loans, up from 33 percent allowed formerly, the RBI said.

The RBI move would allow banks to lower provisioning against bad loans, helping their profitability, said Manish Ostwal, a senior research analyst at brokerage Nirmal Bang, although he doubted it would be game changer.

"Basically it is some relief to the profit and loss statement, but overall, from the economic value prospective, I don't think it will have a major impact," Ostwal said.

India's central bank has been keen to spur the sector to lend more and fuel economic growth, but only a handful of banks have cut lending rates despite two cuts in interest rates, due to weak demand for credit and the high cost of funds.

Banks also continue to struggle with non-performing loans.

The gross bad loans ratio at Indian banks has doubled in the past two years amid an economic downturn.

State-owned banks have amassed bad loans faster than private sector lenders.

Indian banks' gross bad loans ratio could rise to as much as 5.7 percent by March 2016, from 4.5 percent last December, rating agency ICRA estimates.

Following the news, a sub-index of banking stocks extended gains to end 1.8 percent higher in a Mumbai market that also closed 1.8 percent higher.