Banks told to top up bad debt provision buffer at earliest

Source : BL: April 22:2011

The Reserve Bank of India has asked banks to top up at the earliest the buffer provision for bad debts.

Banks were to have achieved a provision coverage ratio (PCR) of 70 per cent of their gross non-performing assets (GNPAs) by September 30, 2010..

Banks that have not achieved this coverage should calculate the required provisions for 70 per cent PCR as on September 30, 2010, and compute the shortfall therefrom, an RBI notification said.

Banks should build up the shortfall in the buffer at the earliest or assess how much more time they would require beyond March 31, 2011, and seek approval from the RBI.

A majority of the banks achieved the PCR of 70 per cent by the September-end 2010 deadline.

But some such as State Bank of India and Bank of Maharashtra were not able to achieve the PCR target by the deadline. The regulator has given them time till September-end 2011.

PRUDENTIAL MEASURE

The RBI has prescribed the PCR as a macro-prudential measure to augment provisioning buffer in a counter-cyclical manner when banks are making good profits.

To banks' representation on whether the prescribed PCR is required to be maintained on an ongoing basis, the RBI said till such time it introduces a more comprehensive methodology of countercyclical provisioning, banks should calculate the PCR with reference to their gross NPA position as on September 30, 2010.

Further, banks have been advised that the surplus of the provision under PCR vis-a-vis as required under prudential norms should be segregated into an account styled “countercyclical provisioning buffer”.

This buffer will be allowed to be used by banks for making specific provisions for NPAs during periods of system-wide downturn, with prior approval, the RBI said in the notification.