RBI relaxes norms for NPA provisioning

Banks can now utilise up to 50% of provisioning buffer for making NPA provisions instead of the earlier 33%

The Reserve Bank of India (RBI) has allowed banks to use 50 per cent of their counter-cyclical provision buffer for specific bad loan provisioning, compared to the current 33 per cent. This will provide relief to banks, struggling with a rise in non-performing assets (NPAs).

The move comes a day before the end of regulatory leeway of lower provisioning for standard restructured advances. From April 1, banks have to make provisioning for standard restructured advances in line with NPA provisioning — 15-20 per cent, depending on whether or not an asset is backed by a security. As of now, banks make five per cent provisioning for such advances. This has led to pressure on banks’ profitability and capital base. Also, they have to set aside more funds for debt recast.

In April 2011, banks were asked to create counter-cyclical buffers, in addition to the floating provision they typically maintained. RBI had told banks they could use the buffers to make specific provisions for NPAs during a system-wide downturn, albeit with a prior approval.

Earlier, RBI had mandated banks to have a 70 per cent provision coverage ratio by September 30, 2010.

While most banks reached the mark on time, since then, most public sector banks have seen loan loss ratios fall, owing to a rise in provisioning for NPAs.

Gross NPAs in the banking system rose from 2.3 per cent in March 2009 to 4.5 per cent in September 2014. The situation worsens if the stressed asset ratio (gross NPA and standard restructured advances) is considered. According to RBI data, the stressed asset ratio as of September 2014 stood at 10.7 per cent. Estimates by rating agencies suggest the ratio could hit 13 per cent by March 2016.