Mumbai: The Reserve Bank of India (RBI) may define good and bad years for banks, based on certain economic indicators, to determine how much provisioning they should make for bad debts, according to two people familiar with the matter.
This is part of the move by RBI to align banks with Basel III norms, which offer guidance on various operational issues, including capital adequacy.
As per the norms, it is a macroprudential issue to set aside more capital when the economy and profitability is good and use those extra provisions when these are not performing as well.
When profitability weakens, banks can set aside less capital. The move may placate banks that have been complaining to RBI about stiff provisioning norms.
Under the proposal, the provision coverage ratio, or PCR, will vary instead of being fixed as now.
PCR is the proportion of funds banks are required to set aside for bad debts. It is calculated in relation to the bad debt of the bank and is currently set at 70% of non-performing assets (NPAs) for most lenders.
According to the people familiar with the matter, RBI may identify certain “trigger points”, such as indicative numbers for growth in credit, deposits, gross domestic product, or the index of the industrial production, to determine good and bad years. Once a certain trigger point is reached, provisioning requirements will change.
“Nothing has been officially told to us, but RBI has discussed the issue with us,” said a senior banker on condition of anonymity.
It is not known if the ratio will be fixed for all banks or would be applicable on a case-by-case basis. Even in bad times, one bank may not be affected to the same degree as another bank. Analysts say that if RBI has to adopt such a strategy, then individual bank performances should be taken into account.
“The implication of this measure will be very different for different banks. The age profile of the bad debt, collateral against the debt, the total capital adequacy as well as profitability of individual banks matter when it comes to PCR and how it affects the banks,” said an analyst.
The proposal is still at the stage of consultation and RBI has not worked out the fine print. At press time, the central bank had not replied to a mail sent by Mint on Monday morning.
Not all have managed to set aside the current 70% provisioning norm. RBI has given extensions to banks to meet the criterion.
State Bank of India, the country’s largest bank, has until September to meet the condition. As of September 2010, the bank’s PCR was 62.78% against gross NPAs of 3.35% of the total advances book.
ICICI Bank Ltd, the country’s largest private sector bank, has until March to meet the norm.
The phased implementation of Basel III norms will start from 1 January, 2013.
“RBI may bring in this norm (on provisioning) even before it implements Basel III in India,” said another senior banker who didn’t want to be identified.
Under the current rules, banks are not allowed to use funds set aside as provisions for capital building. This may also be relaxed, allowing banks to use the funds for other purposes if needed, said the banker.
RBI officials have already said on various platforms that the provisioning requirements could come down.
Executive director Anand Sinha indicated this in December, but didn’t give any timeframe. Sinha, who was speaking at Bancon, the annual bankers’ conference, said the high provisioning requirements were stipulated at a time when Indian banks were having good profits.
“It is not meant to be kept at that level,” Sinha had said, noting that some banks have resented the high provisioning requirement.
“It was part of the process that we are adopting. In good times, you should set aside more capital while in bad times, you should release more capital. It is a first step that we have taken but we are working out details of it, whether it would be 70%, or whatever. It is for building up stock (of capital) in good times,” Sinha later clarified at the sidelines of the conference.