The financial supervisors in Asia have tightened the norms to make provisions for non-performing loans after the crisis hit many countries in late 1990s. But the provisioning stance still remained reactive to shifts in the business cycle, according to a Bank of International Settlements (BIS) study.
A slew of steps by supervisors in Asia over the past 10 years have resulted in banks maintaining higher levels of loan-loss reserves in relation to total loans when various countries are experiencing economic growth and declining levels of non-performing loans.
Yet, the loan-loss provisions have traditionally been backward looking and highly pro-cyclical. That is, they have tended to be low ahead of crises and rise sharply as losses mount.
In response to the latest financial crisis in 2008, national and international authorities are considering measures to promote more forward looking provisioning practices that would result in banks entering periods characterised by deterioration in credit quality with higher levels of reserves.
As loan losses materialise, the already higher level of reserves will reduce the downward pressure on earnings and capital that would otherwise occur.
The Reserve Bank of India, in its second quarter review, asked banks to ensure that they have 70 per cent coverage ratio by September. While many banks have coverage close to the regulatory norm, State Bank of India, ICICI Bank and Canara Bank had levels much below the prescribed norm.
Banks had sought some flexibility in computing coverage ratio to include technical write-offs made by them for bad loans. The regulator relented to the demand, easing the pressure on bottom lines.
The BIS study said the practices adopted by Asian regulators provided useful lessons. Severe losses due to the Asian Financial crisis made them use more conservative loan-loss provisioning standards.
