Currently, banks are required to set aside 70 per cent of their bad debt as per the provision of coverage ratio (PCR). Simply put, for instance, if a Rs 100 loan has turned bad, setting aside 70 per cent as PCR means that the bank has to set aside Rs 70 as provision as it expects to recover Rs 30 of the loan. The notification issued by RBI on Friday wants the cushion -- known as “counter cyclical provisioning buffer” — to be set up out of any surplus available after complying with the stipulated 70 per cent PCR of the gross non-performing assets as of September 2010.
The banking regulator made it clear that the surplus provisions under PCR should be segregated into an account, computation of which may be undertaken as per the format prescribed by it (RBI). However, to dip into this, banks will require approval from the regulator, it added. September 2010 onwards, RBI said, on incremental NPAs banks would have to set aside money based on the income recognition norms. This ranges from 10 per cent in the initial months when the asset is classified as substandard to 100 per cent when it is classified as a loss asset after a few years.
Bankers have welcomed the RBI move. In this context, Indian Banks' Association (IBA) Chairman and also CMD of Bank of Baroda, M D Mallya said “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.”
It may be recalled that many banks including the country's premier lender State Bank of India have had complained in the past that this regulatory compliance is high and dented their profitability, while RBI was insisting that this is a part of prudential norms in tune with international banking practice.
