RBI tightens provisioning norms

The Reserve Bank of India (RBI) on Tuesday increased the provisioning requirements on certain categories of non-performing assets and restructured loans. Bankers, however, said the additional provisioning was unlikely to stress their earnings in coming quarters.

“In April 2011, banks were advised to segregate the surplus of provisions under the provision coverage ratio (PCR) vis-à-vis what was required as per prudential norms as on September 30, 2010, into an account styled as counter-cyclical buffer,” RBI said in its monetary policy statement for 2011-12.

“While the counter-cyclical buffer so created would be available to banks for making specific provisions during economic downturns, there is a need for banks to make higher specific provisions also as part of the prudential provisioning framework,” the central bank said.

Under the new guidelines, loans classified as sub-standard will attract a provision of 15 per cent as against the existing 10 per cent requirement.

For unsecured loans that are classified as sub-standard assets an additional 10 per cent provision has to be made over the 15 per cent. So, the total provisioning for sub-standard unsecured loans will now be 25 per cent instead of 20 per cent as mandated earlier.

The central bank also raised the provision required for the secured portion of advances, which have remained in the doubtful category for up to one year, to 25 per cent from the present 20 per cent. The secured advances in this category for more than one year but up to three years will now attract a provision of 40 per cent instead of 30 per cent.

The restructured loans classified under the standard category will need a provision of two per cent in the first two years from the date of restructuring. In case of moratorium on payment of interest and principal after restructuring, two per cent provision has to be maintained for the period covering the moratorium and two years thereafter, RBI said.

If restructured loans, which are classified as non-performing advances, are upgraded to the standard category, banks have to make a provision of two per cent in the first year from the date of upgrade. The existing provision on these loans was 0.25-1.00 per cent depending on the category of advances.

RBI said it would issue detailed guidelines on new provisioning norms separately.

The new guidelines come within days of RBI saying banks would not be required to set aside additional capital for incremental non-performing assets after September 2010.

Banks are required to maintain a provision coverage ratio of 70 per cent on non-performing loans as on September 30, 2010.

“It is not going to change the provisioning substantially but whatever you provide for overall will now be backed up by a regulatory prescription. If you have more than 70 per cent provision coverage ratio, there will be no immediate impact,” said K R Kamath, chairman and managing director of Punjab National Bank.

His views were echoed by Chanda Kochhar, managing director and chief executive officer of ICICI Bank.

“This is not going to be a major issue for a bank that already has provision coverage ratio in excess of 70 per cent. The higher provisioning criteria for certain categories of assets continues RBI’s moves towards a general increase in provisioning levels for banks to improve the resilience in their balance sheets through the cycle,” she said.

The country’s largest lender, State Bank of India, which is one of the few banks to have less than 70 per cent provision coverage ratio, also dismissed concerns that the burden of excess provisions would deteriorate its earnings.

“We are falling short of the overall provision coverage. But I believe, we will get some relief because we were doing well in respect of prudential provisioning,” Chairman Pratip Chaudhuri said.

Some analysts and bankers said while additional provisioning for non-performing loans would not hit the banks’ earnings; some concerns remain over higher provision requirements for restructured assets.

“The stress from (higher provisioning in) restructured assets could increase,” said M D Mallya, chairman and managing director, Bank of Baroda.

Source: Business Standard