With reference to “Banks get breather on provisioning” (April 23), banks have been plagued with a high degree of non-performing assets (NPAs) for different reasons. Stringent regulatory norms require banks to make an increased provisioning for bad loans as a cushion. It was a good move on the Reserve Bank of India’s part in 2009 to advise banks to maintain a provision coverage ratio (PCR) of 70 per cent of their gross NPAs because banks were making good profits at the time. Although most banks complied within the stipulated deadline of September 30, 2010, some have understandably sought an extension owing to a high burden on their balance sheets. RBI’s announcement that they need not maintain 70 per cent PCR on an ongoing basis and further specifying the end point (which remains September 30, 2010) for setting aside additional provisions will be a big relief to all banks. Banks that failed to achieve the PCR of 70 per cent will have to compute the shortfalls as of the prescribed date and strive to meet them as soon as possible, and banks that have already done so will have the further advantage of segregating the surplus provision under PCR into a separate buffer account that can be used for specific provisioning for NPAs during bad times, subject, of course, to RBI approval. In effect, it is a good step forward by RBI for it provides flexibility to banks to make higher provisioning in good times for use in bad times.
Srinivasan Umashankar, Nagpur
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