Higher provisioning for banks mooted

The Reserve Bank of India has proposed dynamic provisioning for banks — at higher provisioning during economic upturn that could be used during a slowdown when there is higher pressure on loan losses.

In a discussion paper released on Friday, the banking regulator said the policy on provisioning in India is inadequate and there is a need to create counter-cyclical buffers.

“To address pro-cyclicality of capital and provisioning, after the financial crisis, efforts at international level are being made to introduce counter-cyclical capital and provisioning buffers. Reserve Bank has accordingly prepared a discussion paper on counter-cyclical provisioning framework with parameters calibrated based on credit history of Indian banks,” the regulator said.

Feedback on the discussion paper has been sought from stakeholders by May 15. There are four types of provisioning —general provisioning for standard assets, specific provisioning, provision for diminution in the fair vale when an asset is restructured and floating provision. Floating provision, however, is not a regulatory mandate. While proposing the introduction of dynamic provisioning, the central bank suggested doing away with general provisioning.

“This provisioning framework does not have counter-cyclical or cycle smoothening elements. Though RBI has been following a policy of counter-cyclical variation of standard asset provisioning rates, the methodology has been largely based on current available data and judgement, rather than on an analysis of credit cycles and loss history,” RBI said.

It has also said the rate of standard asset provisions has not been determined based on any scientific analysis or credit loss history of banks.

Outlining an indicative methodology for calculating dynamic provisioning requirements, which shows higher provisioning requirement under the new regime, the central bank has asked banks if they will be able to withstand the additional impact of the proposed provisioning framework.

“Do you think the proposed framework would have a permanent impact on the profitability of your bank/banks in general,” RBI asked the banks.