Dynamic provisioning to kick in from June-end, says RBI

The Reserve Bank today said banks will have to implement the dynamic provisioning regime from the end of June in a phased manner, and it will issue detailed guidelines soon.

The move will impact the profitability of banks, especially the state-run banks which have higher NPA levels.

"Based on the new and updated data obtained from banks, which are under examination, it has been proposed to introduce the dynamic provisioning norms in a phased manner from June-end," RBI Governor said in the policy announcement today, adding that guidelines for the same will be issued soon.

In dynamic provisioning, banks set aside reserves for solvency purposes according to the changing credit dynamics and the historical asset quality of individual banks.

RBI, on March 30, 2012, had issued a discussion paper on the dynamic provisioning approach for comments.

Currently, banks generally make two types of provisions: general provisions on standard assets and specific ones for non-performing assets.

As the level of NPAs varies through the economic cycle, the resultant level of specific provisions also behaves cyclically and as a result, lower provisioning during upturns and higher provisioning during downturns have procyclical effect on the real economy.

To address procyclicality of capital and provisioning, after the financial crisis, there have been efforts at the international level to introduce countercyclical capital and provisioning buffers.

RBI has also said it will issue the final guidelines on the management of intra-group transactions and exposures (ITEs) by the end of June.

The draft guidelines, issued last August, prescribed prudential exposure limits on the intra-group exposure of banks along with measures to ensure that banks maintain an arm's length relationship in their dealings with group entities and meet minimum requirements with respect to group risk management and group-wide oversight.

The new measures are aimed at ensuring that banks engage in ITEs in a safe and sound manner for containing concentration and contagion risk arising out of ITEs, the RBI said.