Source:23 APR, 2011, 07.17AM IST,ET BUREAU
The Reserve Bank of India has relaxed norms regarding setting aside money for bad loans - a move which has come as a major relief for all commercial banks. The banking regulator has said banks should maintain 70% of the provision coverage ratio (PCR) of their gross bad loans as on September 2010, but they do not have to maintain 70% of PCR on an ongoing basis.
PCR is the amount that a bank expects to forgo from a loan if they have to writeoff that loan account. Thus if a Rs 100 loan has turned bad, setting aside 70% as PCR means that the bank has set aside Rs 70 as provision and it expects to recover Rs 30 of the loan.
RBI has said September 2010 onwards, on incremental NPAs banks would have to set aside money based on the income recognition norms. This ranges from 10% in the initial months when the asset is classified as substandard to 100% when it is classified as a loss asset after a few years.
Even now, banks follow income recognition norms for making provision on bad loans, however, the provision coverage ratio was over and above it. The central bank has said the surplus of provision under PCR should be segregated into a separate account called 'Countercyclical Provisioning Buffer'.
The Reserve Bank has said this buffer will be allowed to be used by banks for making specific provisions for NPAs during any downturn in the economy. However, to dip into this, banks will require approval from the regulator. "Balance sheet planning will become easier. If a bank earns windfall profit, say from treasury operations, it can be set aside as a buffer and subsequently used during bad times," said MD Mallya, chairman of the Indian Banks' Association and CMD of Bank of Baroda .
"Incrementally, it will bring down banks' requirement for making provisions," said Somnath Sengupta, executive director and chief financial officer of Axis Bank. The Reserve Bank of India has said the majority of the banks have achieved 70% of PCR and had represented RBI whether the prescribed PCR is required to be maintained on an on-going basis.
While most banks already achieved 70% PCR, banks such as the State Bank of India has asked for time till September 2011. Its PCR stood at 64% as on December 2010.
PCR is the amount that a bank expects to forgo from a loan if they have to writeoff that loan account. Thus if a Rs 100 loan has turned bad, setting aside 70% as PCR means that the bank has set aside Rs 70 as provision and it expects to recover Rs 30 of the loan.
RBI has said September 2010 onwards, on incremental NPAs banks would have to set aside money based on the income recognition norms. This ranges from 10% in the initial months when the asset is classified as substandard to 100% when it is classified as a loss asset after a few years.
Even now, banks follow income recognition norms for making provision on bad loans, however, the provision coverage ratio was over and above it. The central bank has said the surplus of provision under PCR should be segregated into a separate account called 'Countercyclical Provisioning Buffer'.
The Reserve Bank has said this buffer will be allowed to be used by banks for making specific provisions for NPAs during any downturn in the economy. However, to dip into this, banks will require approval from the regulator. "Balance sheet planning will become easier. If a bank earns windfall profit, say from treasury operations, it can be set aside as a buffer and subsequently used during bad times," said MD Mallya, chairman of the Indian Banks' Association and CMD of Bank of Baroda .
"Incrementally, it will bring down banks' requirement for making provisions," said Somnath Sengupta, executive director and chief financial officer of Axis Bank. The Reserve Bank of India has said the majority of the banks have achieved 70% of PCR and had represented RBI whether the prescribed PCR is required to be maintained on an on-going basis.
While most banks already achieved 70% PCR, banks such as the State Bank of India has asked for time till September 2011. Its PCR stood at 64% as on December 2010.
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