Banks lose floating provision leeway

The Reserve Bank of India (RBI) has clamped down on utilisation of floating provisions by banks to boost profits.

In a circular to all banks, RBI banned reversal of floating provisions by credit to the profit and loss account. The floating provisions can only be utilised for making specific provisions in extra-ordinary circumstances.

The floating provisions can be used only for contingencies under extraordinary circumstances for making specific provisions in impaired accounts after obtaining board's approval and with prior permission of the RBI.

The boards of banks have been asked to lay down an approved policy as to what circumstances would be considered extraordinary.

Until such utilisation, banks have been allowed to use floating provisions for netting off from gross non-performing assets (NPAs) to arrive at disclosure of net NPAs.

Alternatively, provisions can be treated as part of tier II capital within the overall ceiling of 1.25 per cent of total risk-weighted assets.

RBI said the use of floating provisions to set off against provisions required to be made appear to have been used in "smoothening of profits in some cases" and hence it decided to revise the instructions on utilisation, creation, accounting and disclosures of floating provisions.