RBI orders hike in provision for bad, doubtful loans

04 May 2011

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The Reserve Bank of India on Tuesday asked banks to set aside higher reserves to cover bad and doubtful loans, including restructured loans, as part of its prudential provisioning framework.

Banks' bad loans are classified into three categories - sub-standard, doubtful and loss. For advances classified as ''sub-standard'', banks will now have to provision 15 per cent, against the existing 10 per cent, the apex bank said in its monetary policy statement for financial year 2011-12 in Mumbai.

A provision of 40 per cent has been prescribed for the secured portion of advances which remained in the ''doubtful'' category for more than one year but up to three years. The existing provision is 30 per cent.

In the case of restructured accounts classified as standard advances, provisioning has been increased to 2 per cent in the first two years from the date of restructuring as against the existing range of 0.25-1 per cent, depending upon the category of advances, the RBI said.

In December 2009, banks were told to maintain a provisioning coverage ratio (PCR) of 70 per cent for their non-performing advances by end-September 2010. This coverage ratio was intended to achieve a "counter-cyclical" objective by ensuring that banks build up a good cushion of provisions to protect them from any macroeconomic shock in the future.

Last month, banks were asked to segregate the surplus of provisions under the PCR vis-a-vis as required as per the prudential norms as on 30 September 2010, into an account called counter-cyclical buffer.

"While the counter-cyclical buffer so created would be available to banks for making specific provisions during economic downturns, there is a need for banks to make higher specific provisions also as part of the prudential provisioning framework," the RBI said.

Although the new provisions will lead to higher costs, most bankers welcomed the move, saying it was more in line with international practices, and more rational than the 70 per cent PCR system.

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