MUMBAI: In a move that will ease pressure on bank profits, Reserve Bank of India has said that an earlier guideline requiring additional funds to be set aside for bad loans will not apply to loans that turn bad after September 2010.
This move will benefit all lenders as RBI has now specified the end point for setting aside additional provisions on bad loans. These guidelines on additional provisions were issued in October 2009 after banks turned in large profits following a bounce back from the global financial crisis.
At that time, the central bank had said that the idea was to build up a capital buffer during good times so that it could be used ifthe outlook for the economy changes. suddenly
State Bank of India will gain directly from this measure as RBI has said that even for those banks that have not achieved the prescribed provision coverage ratio, the target date continues to be September 30, 2010. SBI has been struggling to meet the 70% PCR and was expected to meet the target in the current fiscal. "Some of the banks that had been granted extension of time beyond the stipulated date for achieving the PCR of 70% on their request should calculate the required provisions for 70% PCR as on September 30, 2010 and compute the shortfall there from," said RBI "What this means is that after making provisions for NPAs as on September 2010, banks will only need to make the normal provisions for bad loans and the additional burden on the balance sheet will cease. But going forward, provision requirement could get stiffer as regulators move towards advanced accounting standards," said the chairman of a public sector bank.
But banks that have already made a provision will need to keep it aside as an additional buffer. "The surplus of the provision under PCR vis-Ã -vis as required according to prudential norms should be segregated into an account styled as 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 the prior approval of RBI," the central bank said.
In a recent report on the banking sector, Care ratings had said that banks had improved its provision coverage ratio to 58.31% by end-December 2010 from 52.85% a year back.
Private banks have already crossed RBI's prescriptions by achieving a PCR of 74% as against 70% mandated by RBI but public sector banks continued to lag with a PCR of 54.41%. "On an overall basis, provisioning expenses rose by 54.48% on y-o-y basis in 9MFY11 on back of higher NPA provisioning by banks to achieve the RBI mandated 70% NPA provision coverage," Care said.
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This move will benefit all lenders as RBI has now specified the end point for setting aside additional provisions on bad loans. These guidelines on additional provisions were issued in October 2009 after banks turned in large profits following a bounce back from the global financial crisis.
At that time, the central bank had said that the idea was to build up a capital buffer during good times so that it could be used ifthe outlook for the economy changes. suddenly
State Bank of India will gain directly from this measure as RBI has said that even for those banks that have not achieved the prescribed provision coverage ratio, the target date continues to be September 30, 2010. SBI has been struggling to meet the 70% PCR and was expected to meet the target in the current fiscal. "Some of the banks that had been granted extension of time beyond the stipulated date for achieving the PCR of 70% on their request should calculate the required provisions for 70% PCR as on September 30, 2010 and compute the shortfall there from," said RBI "What this means is that after making provisions for NPAs as on September 2010, banks will only need to make the normal provisions for bad loans and the additional burden on the balance sheet will cease. But going forward, provision requirement could get stiffer as regulators move towards advanced accounting standards," said the chairman of a public sector bank.
But banks that have already made a provision will need to keep it aside as an additional buffer. "The surplus of the provision under PCR vis-Ã -vis as required according to prudential norms should be segregated into an account styled as 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 the prior approval of RBI," the central bank said.
In a recent report on the banking sector, Care ratings had said that banks had improved its provision coverage ratio to 58.31% by end-December 2010 from 52.85% a year back.
Private banks have already crossed RBI's prescriptions by achieving a PCR of 74% as against 70% mandated by RBI but public sector banks continued to lag with a PCR of 54.41%. "On an overall basis, provisioning expenses rose by 54.48% on y-o-y basis in 9MFY11 on back of higher NPA provisioning by banks to achieve the RBI mandated 70% NPA provision coverage," Care said.
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