RBI: Banks should increase provisioning on bad loans

Mundra says banks should increase the provision coverage ratio instead of chasing profitability

Reserve Bank of India Deputy Governor S S Mundra on Friday said banks should increase the provision coverage ratio (PCR) and aim to raise it to 70 per cent, the amount lenders were mandated to maintain earlier.

"We do not have a prescribed level. We would encourage that on their own, they should inch it up to the extent possible. I don't have any percentage in mind. There is no prescription at this point of time but let's say there was a benchmark earlier, it would be a good thing to at least aim for that benchmark," said Mundra.

Earlier, banks were required to mandatorily maintain a PCR of 70 per cent. But, the mandate was withdrawn in September 2011 after most banks had met the criterion.

Now, with the rise in bad loan, banks are increasingly reducing the PCR to ensure that the profitability is not hit adversely. In fact, several public sector banks (PSBs) have seen a reduction in their PCR, as non-performing assets (NPAs) in balance sheets have increased. Several banks' PCR stand at about 50 per cent mark.

Mundra also added banks should increase the PCR instead of chasing profitability.

He also said it was not only the PSBs but also the private lenders that are increasingly witnessing asset quality pressure.

"Even though the difference in NPA levels between PSBs and private sector remains, we are beginning to see some convergence (on the NPA level)," said Mundra.

He also said early recognition of bad assets will help in preserving the health of the assets and will also ensure speedier recovery. In case where banks are responsible, lenders have been asked by the regulator to help in further financing as long as it is being done with the intention of resolving the problem and not for evergreening.

Mundra also added a word of caution saying it was in the interest of the borrowers to co-perate in case of defaults. As there are several investigative agencies and the legal system which can bring the erroneous defaulter to task.