Rbi Tightens Npa Provisioning, Profitability Estimates To Be Hit

Banks directed to base NPAs on RBI inspectors reports

In a major tightening of provisioning norms, the Reserve Bank of India (RBI) has asked commercial banks to provide for the difference between the provisions made by banks for their non-performing assets and those reported by the RBI inspectors in the financial statements of 1996-97.

Henceforth, banks will have to provide for their non-performing assets based on the assessment made by the RBI inspectors.

The RBIs directive is expected to send the profit projections of most of these banks for 1996-97 haywire.

The results of banks for the year ended March 1997 will see a sharp rise in provisions, since most of them under-provide for their non-performing assets, said a RBI official.

 

The apparent objective of the directive is to prevent a repeat of the Indian Bank fiasco. In the Indian Bank case, the RBI inspectors had repeatedly told the bank to make provisions as per their evaluation of the non-performing assets. However, Indian Bank refused to obey their instructions. Subsequently, the banks net worth was wiped out when the provisions had to be eventually made.

Now, the Reserve Bank wants the commercial banks to stick to provisioning as indicated by its inspectors.

In a circular issued to the chief executives of banks a few days ago, the RBI said, Scheduled commercial banks have been advised that the statutory auditors could have dialogue with the regional office of RBI in regard to the divergences in the asset valuation as also the provision required for non performing/eroded as spelt out in the inspection reports of banks with reference to the financial position on March 31, 1996 or a subsequent date, before finalising the account for March 31, 1997.

The RBI circular adds that the board of financial supervision has decided that the assessment made by the inspecting officer should be taken into account before finalising the accounts for the year ended March 31, 1997.

After this, if there is a shortfall in provisioning for loan losses, other assets and other liabilities, it should be made good.

The Reserve Bank has also stated that the development in non-performing assets after the inspection report should also be taken into account while making the provision.

The practice of taking the RBI inspectors assessment into account will have to be followed in the future also. The RBI has also forwarded a list of individual advances to banks where there is variance in provisioning requirements between the Reserve Bank inspectors and the banks.

The RBI note says: A list of advances where the variance in the provisioning requirements between the RBI and the bank is Rs 25 lakh or above in the case of public sector banks, new private sector banks and foreign banks and Rs 10 lakh or above in the case of other private sector banks has been enclosed.

The reasons for such assessment by the inspectors have also been sent to the banks. The items in respect of investment, other assets and understatement of other liabilities irrespective of the quantum of divergence have been sent to the banks.

The results of banks for the year ended March 1997 will reveal a rise in provisions, since most of them under-provide for their non-performing assets, said a