Allowed to calculate provisioning coverage ratio on the basis of the gross NPA position on September 30, 2010.
In a big relief to banks, the Reserve Bank of India (RBI) on Friday relaxed the provisioning norms for bad loans, reducing the burden on capital.
Banks would not be required to set aside additional capital for incremental non-performing assets (NPAs) formed after September 30, 2010, RBI said.
In 2009, RBI had asked banks to maintain a provisioning coverage ratio (PCR) of 70 per cent of gross NPAs on an ongoing basis. It on Friday said the provisioning need not be on an ongoing basis. Banks can calculate their PCRs on the basis of the gross NPA position on September 30, 2010.
“A majority of banks have since achieved 70 per cent PCR and have been asking RBI whether the prescribed PCR is required to be maintained on an ongoing basis,” RBI said.
This will bring down the provisioning requirement in absolute terms. “It is a positive step for banks as it gives them flexibility in making provisions in good times for use in times when NPAs increase,” said M D Mallya, chairman and managing director, Bank of Baroda.
“We have to study the circular. At this point it is difficult to say what could be the impact,” said Somnath Sengupta, executive director and chief financial officer, Axis Bank.
Analysts, however, expect banks to continue with higher provisioning as it leads to better valuations.
“Even though RBI has relaxed the norms, we don’t expect banks to lower provisioning, as a higher provisioning adds strength to the balance sheet. It gives a valuation premium,” said an analyst with a domestic broking firm.
RBI also said that banks that were given more time to meet the norms would have to calculate their shortfall in comparison to the provisioning required on gross NPAs on September 30, 2010.
“This shortfall should be met at the earliest and these banks should reassess the time required beyond March 31, 2011, if any, to build the buffer, and seek approval from RBI,” said RBI.
ICICI Bank, State Bank of India, UCO Bank and Bank of Maharashtra were among banks that were given more time. Others had to comply with the norm by September 30, 2010. ICICI Bank’s PCR crossed 70 per cent on December 31, 2010, one quarter before the deadline. SBI has time till September 30, 2011. Now, it can seek more time from RBI.
Banks are to follow the latest guidelines till RBI introduces a more comprehensive methodology of countercyclical provisioning taking into account the international standards being developed by the Basel Committee on Banking Supervision and other norms.
RBI said excess provisioning should be segregated into an account styled as a ‘countercyclical provisioning buffer.’ This buffer would be allowed to be used for making specific provisions for NPAs during periods of systemwide downturns, with RBI’s approval, it said.
