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Business News/ Market / Stock-market-news/  RBI relaxes bad-loan provisioning rules for banks
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RBI relaxes bad-loan provisioning rules for banks

The central bank relaxed rules against bad loans by allowing banks to set aside up to 50% of floating provisions from 33%

The relaxation will be applicable for floating provisions held by them as of the end of December 2014. Photo: ReutersPremium
The relaxation will be applicable for floating provisions held by them as of the end of December 2014. Photo: Reuters

Mumbai: The Reserve Bank of India (RBI) on Monday allowed banks to use up to 50% of their counter-cyclical buffer to provide for non-performing assets (NPAs), up from the 33% that they were allowed to use so far.

A counter-cyclical buffer is the mandatory capital that banks are required to keep aside beyond their minimum capital requirements to deal with extraordinary situations. Counter-cyclical buffers were introduced globally after the financial crisis of 2008 to ensure that banks are not short of capital whenever systemic risks increase.

In India, bank provisions above the compulsory 70% provision coverage ratio are considered as counter-cyclical. “This buffer will be allowed to be used by banks for making specific provisions for NPAs during periods of system-wide downturn, with the prior approval of RBI," the central bank had said in a notification while announcing counter-cyclical buffers in April 2011.

Stressed assets across the Indian banking sector have risen following the economic slowdown, and in part due to poor credit evaluation procedures across some parts of the sector.

According to the latest RBI data, overall stressed assets, including restructured assets and bad loans, rose to 10.7% by the end of September 2014, compared to 10% in March 2014.

The reported level of bad loans is also set to go up starting fiscal 2016, as a forbearance given to restructured loans will be withdrawn starting 1 April. After that, fresh restructured loans will be counted as NPAs.

RBI said banks can now use up to 50% of counter-cyclical provisioning held by them as at the end of 31 December 2014, for making specific provisions on NPAs according to their board-approved policy.

Suruchi Jain, equity research analyst at Morningstar Investment Adviser India Pvt. Ltd, said the central bank’s move is most likely to push banks to provide more for NPAs.

“Most banks end up underproviding. This is another incentive for banks to provide more because, typically, it has been seen that the earnings of banks that set aside more counter-cyclical provisions are more solid," Jain said.

The higher headroom to provide for NPAs is a welcome move, said N.S. Venkatesh, executive director, treasury, and chief financial officer at IDBI Bank Ltd. “It will give banks a small relief in NPA provisions before the end of the financial year because they can use the counter-cyclical funds they have by 17% more. But how each bank can use it will depend on how much extra provisions they have and how much more they can keep aside for NPAs," he said.

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Published: 30 Mar 2015, 04:10 PM IST
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