Provisioning Reprieve For Commercial Banks

The primary responsibility of making adequate provisions for a diminution in the value of loan assets, investments or other assets lies with the management and statutory auditors of a bank, the Reserve Bank of India has said. The central bank has made it clear that the assessment made by its inspecting officers is furnished essentially to assist the bank management and the statutory auditors.

This marks a climbdown by RBI and a reprieve for commercial banks, whose financial results for 1996-97 would have suffered owing to RBI's earlier stand that the difference between the assessments of its inspecting officers and that of the banks' statutory auditors would have to be provided for by the banks. The earlier directive, issued on October 31, 1996, had sent commercial banks into a tizzy, with many bank managements urging the central bank to reconsider its stand.

 

The climbdown was conveyed to the banks through a circular dated May 15, 1997, issued by the central bank's department of supervision.

The RBI has conveyed that the assessment of its inspecting officers was aimed to aid the banks and their statutory auditors in taking a decision with regard to making adequate and necessary provisions in terms of the prudential guidelines.

The RBI assessment is merely to serve as a guideline for the banks in arriving at the correct provisioning level.

The central bank has also advised its regional offices to send the banks a list of individual advances in which the difference between the assessment of provisioning requirements by RBI and the bank is above a certain level, so that the banks and their auditors can take it into account while making provisions for loan losses.

The banks, which were set to be hit to the tune of Rs 700 crore following the RBI directive of October 31, 1996, have now been let off the hook and can, along with their auditors, arrive at the provisioning based on the overall norms.

Since there are statutory auditors assessing the loans, there is no reason why the RBI assessment should be mandatory. The latest move, leaving it to the banks and the auditors, is a good thing, said a senior official of a bank.