Banks told to set aside more funds for bad, restructured loans

MUMBAI: The Reserve Bank of India (RBI) has asked banks to set aside more money for bad and restructured loans , a move which will impact their overall cost and has come as a surprise to most bankers. Higher provisions for bad loans comes within a week of the central bank doing away with mandated 70% provision coverage ratio (PCR) norm. SBI chairman Pratip Chaudhuri said, "This comes as a relief. Overall this is a more prudential provisioning requirement and more aligned to international practices."

Among the major changes, banks will now have to set aside 15% as provision for substandard loans -- loans where interest or principal is not paid for 90 days against 10% earlier --and set aside 25% (20% earlier) for unsecured substandard loans. According to S Raman, CMD of Canara Bank , "The impact on the bottomline will depend on the extent to which a bank is able to pass on the high cost of provisions to borrowers." RN Pradeep, CMD of Corporation Bank , said: "It has been rationalised and it is better than 70% PCR that banks were earlier required to maintain on an ongoing basis." B Prabhakar, executive director of Bank of India, said that provisions for incremental NPA will go up by 10% for the banking sector.

Also, provisions on restructured accounts classified as standard advances will be 2% in the first two years from the date of restructuring (0.25-1 %) and on restructured accounts classified as NPA, when upgraded to standard category, provisioning will be 2% in the first year from the date of upgradation (0.25-1 %). Provision for secured loans in doubtful category for one year will be 25% (20%) and secured between one to over three years loan in doubtful category will attract 40% (30%) provisioning.

Source: EconomicTimes