RBI asks banks to create special buffer

Mumbai: The Reserve Bank of India (RBI) has asked banks to create special buffers to be used by banks for making specific provisions for bad loans during system-wide downturns.

The RBI wants the cushion – called the “counter-cyclical provisioning buffer” – to be set up out of any surplus available after complying with the stipulated 70% provision of coverage ratio (PCR) of the gross non-performing assets as of September 2010.

The central bank on Friday issued a notification to enforce the norms on creation of the defence mechanism by banks.

The surplus provisions under PCR should be segregated into an account, computation of which may be undertaken as per the format prescribed by the RBI , the notification said.

Bankers have welcomed the move. S Raman, CMD, Canara Bank, said: “Our PCR currently is 74% as of now, which is more than the RBI requirement. Hence, we have already started creating a buffer as per the RBI guideline.”’

The new guideline is basically in the context of Basel III requirements, he added. “In fact, Basel III requires more aggressive capital provisioning, particularly when the going is good for banks. The RBI is always ahead of the curve when it comes to the implementation of prudential norms. So Canara Bank has no problem in going for the floating provisioning,” he said.

Another chief of a public sector bank said on condition of anonymity banks that have not been able to comply with the RBI norm of 70% PCR by September 2010 may approach the central bank and ask it to provide them another six months’ time, on the lines of the extension granted to the State Bank of India, so that they could reach the required level. Banks that have already achieved the 70% PCR will now have to go for an additional provisioning against their NPAs without affecting their net profit, he said..

However, most banks have achieved the PCR of 70%.

The central bank had earlier argued that there is a realisation from a macro-prudential perspective that banks should build up provisioning and capital buffers in good times, that is, when higher profits can be used for absorbing losses in a downturn.

Source: Financial Express