Banks can deduct floating provision from gross NPAs

RBI move will help lenders report lower bad debts, higher profits.

The Reserve Bank of India (RBI) has agreed to a request from banks for reversal its guidelines on floating provisions.

The regulator will now allow banks, at least in the current financial year, to deduct floating provisions from gross non-performing assets (NPAs) to arrive at net NPAs, KC Chakrabarty, deputy governor of RBI, told Business Standard today.

Floating provisions are part of profits kept for contingencies. Chakrabarty said RBI would notify the revised guidelines shortly.

RBI is of the view that since banks will shift to the International Financial Reporting Standard (IFRS) from 2011-12, till then they can deduct floating provisions from gross NPAs.

But banks will have to also prepare their accounts according to the IFRS for 2010-11 in order to show the comparative figure in 2011-12.

In March, the central bank had said that banks would not be allowed to deduct floating provisions from gross NPAs to arrive at net NPAs. It said they would have to add floating provisions in Tier-II capital. Though the norm was to be applicable for the January-March quarter, it was differed to the April-June quarter.

While most banks complied with the new norms while reporting their first-quarter earnings, RBI allowed three banks, Bank of Baroda, Punjab National Bank (PNB) and Central Bank of India, to deduct floating provisions from gross NPAs. However, it rejected similar requests from Union Bank of India and Indian Bank.

Due to this, the latter saw a sharp rise in net NPAs in the first quarter.

Union Bank of India, for example, had to reckon floating provisions of Rs 530 crore as part of Tier-II capital. As a result, the bank’s net NPAs rose to 0.72 per cent in the June quarter from 0.15 per cent a year ago.

PNB, on the other hand, netted Rs 1,080 core floating provisions from gross NPA to report net NPAs of 0.19 per cent at the end of June. The bank’s net NPA came down significantly. The figure was 0.63 per cent as on June 30, 2008.

Banks also took up the issue of treatment of floating provisions with the governor of RBI at the meeting on the first-quarter review of the annual policy on July 28. Banks were assured by the regulator that it would clarify the issue shortly.