Graded provisioning for bad loans to be effective next fiscal

The Reserve Bank of India has decided to introduce graded higher provisioning according to the age of non-performing assets (NPAs) with effect from March 31, 2005.

With the enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the chances / extent of recovery of an asset reducing over a period of time, the central bank said it is essential that banks expedite recovery of NPAs.

As per the additional provisioning requirement for NPAs, when an outstanding block of NPAs has remained in the 'doubtful for more than three years' category as on March 31, 2004, the provisioning on the secured portion will be 60 per cent as on March 31, 2005; 75 per cent as on March 31, 2006; and 100 per cent as on March 31, 2007.

When an advance is classified as 'doubtful for more than three years' on or after April 1, 2004, the provisioning requirement on the secured portion will be 100 per cent.

The RBI said the portion of the advance, which is not covered by the realisable value of tangible security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis, provision will be to the extent of 100 per cent.

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 NPAs included in 'doubtful for more than three years' category, the provisioning requirement on the secured portion remains unchanged at 50 per cent, irrespective of its age, till it is identified as a loss asset.