RBI ups provisioning for bad loans

The Reserve Bank of India (RBI) today tightened the prudential norms for banks and raised provisioning requirement for bad loans by up to 10%, a development that would impact bottom lines of banks.

Advances classified as sub-standard will attract a provision of 15% against the existing 10%, RBI said in a notification. An asset would be classified as sub-standard asset, if it remains non-performing for a period of 12 months.

Thus, for an example, a sub-standard loan in secured category of Rs 100 would now attract provision of Rs 15 against the earlier provision of Rs 10, said an analyst.

"At the same time, the unsecured exposures classified as sub-standard assets will attract an additional provision of 10% that is  a total of 25% as against the existing 20%," it said.

Unsecured loans are those where no collateral is involved. These loans would include education loans.

In case of doubtful loans which remains non-performing for 24 months, the provision requirement varies from 25% to 100%.An asset would be classified as doubtful if it has remained in the sub­standard category for a period of 12 months.

If asset has remained doubtful for one year, it would attract a provision of 25% against 20%. Provision for doubtful loans up to three years has been enhance from 30% to 40%.

It is 100% in case of such assets remained in doubtful category beyond three years, it said. In cases of restructured accounts classified as standard advances, in the first two years from the date of restructuring would attract loan provisioning of 2% as compared to up to 1%.

The increase in provisioning requirement would have direct bearing on the net profit of the banks and the profitability is expected to be hit by 15-20 basis points, a senior official of a public sector bank said.

High provisioning would reduce the operating profit of banks and eventually the net profit would be impacted.

The notification comes in after RBI Governor D Subbarao proposed to enhance the provisioning requirements for the following categories of non-performing advances and restructured advances.

"While the "counter-cyclical buffer" so created would be available to banks for making specific provisions during economic downturns, there is a need for banks to make higher specific provisions also as part of the prudential provisioning framework," Subbarao had said while unveiling the annual credit policy on May 3.

In December, 2009, banks were told to maintain a provisioning coverage ratio (PCR) of 70% for their non-performing advances by September-end, 2010. This coverage ratio was intended to achieve a 'counter-cyclical' objective by ensuring that banks build up a good cushion of provisions to protect them from any macroeconomic shock in the future.

However, last month, banks were asked to segregate the surplus of provisions under the PCR vis-a-vis as required as per the prudential norms as on September 30, 2010, into an account called counter-cyclical buffer.