Higher provisioning for over 3-year old NPAs

RBI ANNUAL POLICY STATEMENT, 2004-05

Moving towards tightening prudential norms, the Reserve Bank of India (RBI) has directed banks to increase their provisioning limits for doubtful non-performing assets (NPAs) for the more than three-year category.

With regard to defining a wilful defaulter, the RBI has said that banks should give adequate opportunity to the defaulter to be heard before being declared a defaulter.

This comes against the backdrop of complaints the RBI has received of the damage done to the reputation of a person. Indian banks have already adopted international prudential norms on sticky assets recognition. They embraced the 90-day NPA recognition norm in the last financial year.

The RBI's annual policy statement which was released today stated that banks with effect from March 31, 2005, should introduce graded higher provisioning, according to the age of NPAs, which are included in the 'doubtful for more than three years' category.

At present, banks are required to make provisions on NPAs on a graded scale, based on the age of the NPA. However, in respect of assets that are doubtful for more than three years, the provisioning requirement on the secured portion remains unchanged at 50 per cent, till it is identified as a loss asset.

The central bank has also asked banks to increase the risk weight for exposure to all public financial institution (PFIs) to 100 per cent from 20 per cent.

The apex bank in its policy statement said that preferential treatment to PFI's for capital adequacy purposes on a privileged basis is not justified.