RBI speaks up again for dynamic provisioning

The Reserve Bank today stressed the importance of dynamic or expected loan loss provisioning to maintain financial stability.

“Dynamic or expected loan loss provisioning can contribute to financial stability by recognising losses early in the cycle at the time of loan origination, by building up buffers in good times that can be used in bad times, thereby limiting the consequences during a downturn,” said Executive Director B Mahapatra.

He said: “While there is no guarantee that dynamic provisions will be enough to cope with all the credit losses of a downturn and, therefore, might not tame credit cycles by itself, the time has come for forward-looking provisions which, when properly calibrated, can act as a dependable macro-prudential policy instrument, to hedge against risks in banks’ balance sheets, thereby enhancing the resilience of both individual banks as well as the banking system as a whole.”

 

Dynamic provisioning is a tool deserving attention from policy makers and regulators, since it distributes loan losses evenly over the credit cycle, applying the breaks on an important source of pro-cyclicality in banking, Mahapatra said.

In March, RBI had published a discussion paper on the introduction of a dynamic provisioning framework, for comments from stakeholders.

According to the current regulations, banks make two types of provisioning — general ones on standard assets and specific provisions on non-performing assets. RBI had then said, “After the financial crisis, efforts at an international level are being made to introduce countercyclical capital and provisioning buffers...accordingly, prepared (this) discussion paper on (a) countercyclical provisioning framework, with parameters calibrated based on the credit history of Indian banks.”

Mahapatra added, “In December 2009, a minimum Provisioning Coverage Ratio was introduced by RBI to ensure build-up of provisioning buffer, when banks in general were making good profits. This was intended to be an interim measure till the time any comprehensive scientific study, based on the credit history of our banks, was attempted by RBI and till the time it comes with a countercyclical provisioning framework.”