Banks' profits to go up on RBI relaxing provisioning norms
Monday, 25 April 2011, 15:52 IST
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New Delhi: The Reserve Bank's recent decision to relax provisioning requirement for banks will improve the profitability of lenders in the short run, bank officials have said. Responding to representations of banks on mandatory provisioning of bad assets, RBI has said that till the time it introduces a more comprehensive methodology of countercyclical provisioning taking into account the global standards, lenders are required to set aside stipulated capital with reference to NPA position as on September, 2010. Welcoming the decision, a senior banker said the initiative will help in improving the bottomline of banks as they will not have to make additional provision towards bad assets. Thus, operating profit will not be drained out for making additional provision for rise in bad debts, another banker said. As per the current prudential norms, banks are required to set aside capital to the tune of 70 percent of their bad debt on running basis. This is called as provision coverage ratio (PCR). Country's largest lender State Bank of India's profitability has been impacted as the bank had to set aside capital each quarter to meet the 70 per cent provision coverage ratio as prescribed by RBI. The bank has been given additional time till September this year to meet requirement. RBI decided to hike the provision level in the aftermath of financial downturn with a view to enhance the asset quality in the banking system as additional provisioning would give more cushion to banks against the rise in bad loan levels. Majority of the banks achieved the PCR of 70 per cent and have been representing to RBI whether the prescribed PCR is required to be maintained on an ongoing basis, RBI said in a notification. "The matter has been examined and till such time RBI introduces a more comprehensive methodology of countercyclical provisioning taking into account the international standards as are being currently developed by Basel Committee and other provisioning norms," it said, adding banks are required to set aside stipulated capital with reference to gross NPA position as on September 30, 2010, it said. Besides, banks have been allowed to utilise the additional PCR beyond the 70 per cent for making provision against bad assets. "The surplus of the provision under PCR vis-a-vis as required as per prudential norms should be segregated into an account styled as countercyclical provisioning buffer," it said. This buffer, it said, will be allowed to be used by banks for making specific provisions for non-performing assets (NPAs) during periods of system wide downturn, with the prior approval of RBI
Source: PTI