With a view to protect their profit margins, many banks have asked the Reserve Bank of India (RBI) to cut provisions on small ticket restructured loan outstanding.
Banks have been directed by the banking regulator to make provisions of 5% on all restructured loans with outstanding of up to Rs 1 crore. This percentage of provisions is hampering the profit margins of the banks since majority of the restructured loans are below Rs 1 crore. Bankers are suggesting RBI to lower the provisions to as low as 2%.
Executive Director of Union Bank of India, TY Prabhu said, "For the banking sector, a bulk of accounts, which would be restructured, belong to the less-than Rs 1 crore category. But that does not necessarily mean that the economic loss incurred by banks in restructuring these loans is as steep as 5%. There is a case for lowing the provision."
On the other hand, banks have to calculate the net present value of the restructured loans that are above Rs 1 crore to arrive at the prerequisite provisioning. In case if a borrower is asked to pay higher amount after the restructuring than what it would have paid before restructuring then no provision is required on the bank's book. However if the net payment after restructuring is less, then provisions based on the loss suffered by the bank has to be made.
Presently banks have been given a choice between making provisions for loans that are less than 1 core and calculating the provision on each account of Rs 1. Banks prefer to make provisions on their portfolios because calculating the provisioning amount on each account is a tiresome process.
Indian Overseas Bank executive director G Narayanan said, "On one hand, RBI allows restructuring of loans to revive the economy and on the other hand, steep provisioning norm pinches the profit and loss of banks."
The circular by RBI states that, "If due to lack of expertise/appropriate infrastructure, a bank finds it difficult to ensure computation of diminution in the fair value of advances extended by small/rural branches, as an alternative to the methodology prescribed above for computing the amount of diminution in the fair value, banks will have the option of notionally computing the amount of diminution in the fair value and providing therefore, at 5% of the total exposure, in respect of all restructured accounts where the total dues to bank(s) are less than Rs 1 crore till the financial year ending March 2011. The position would be reviewed thereafter."
In August 2008, RBI had taken a decision to fix a flat 5% provisions on restructured loan outstanding. The regulator took such a decision on the basis on losses suffered by the banks but now the banks claim that provisioning of 5% is hitting their profit margins.