The Reserve Bank of India has prescribed a uniform formula for computing the diminution in fair value of restructured loans.
Diminution is the pared down value of loans that have come for restructuring.
Banks used to value restructured loans differently in different economic cycles. This was because the diminution or depreciation in value generally comes with general rise in the interest rates in the economy.
The formula has particularly resulted in higher provisioning due to rise in the rate of interest during last few years, adding to the financial difficulties when banks’ margins are already stressed due to the current downturn.
Therefore, the RBI is of the view that the formula may be modified in such a way that the changes in fair value of the loan attributed to the changes in market interest rates are not taken into account while computing the diminution.
RBI rule
The Reserve Bank of India on Thursday postponed the implementation of rule that bars banks from deducting floating provision (made for non-performing assets) from the Gross NPAs for the financial year 2009-10. Last month, the RBI had told banks to consider floating provisions as part of tier capital II instead of deducting them to arrive at net NPA position for the financial year ended March 2009.