In its quarterly review, Reserve Bank of India has directed banks to increase their provisions for non performing assets (NPAs) to 70 percent which include floating provisions.
RBI wants the banks to achieve this target by September 2010. Banks have, however, requested the apex bank to extend the deadline.
RBI said, "With a view to improving the provisioning cover and enhancing the soundness of individual banks, it is proposed to advise banks to augment their provisioning cushions consisting of specific provisions against NPAs as well as floating provisions, and ensure that their total provisioning coverage ratio, including floating provisions, is not less than 70 per cent."
The current provisioning requirements for NPAs range from 10 percent to 100 percent of the outstanding amount, depending upon the internal policy of the bank. The level of coverage would differ from bank to bank because of different types of NPAs.
>RBI's deputy governor, Ms Usha Thorat said that this would act as a buffer and a cushioning measure. "Overall, the feeling is that this is the time when one can increase the buffers that can be utilized in a better manner when they are really required," she said.
Canara bank's Chairman and Managing Director said that if written-off assets were considered, provisioning coverage ratio for all banks would be above 70 percent. "The written-off assets are not abandoned advances, but are a part of our loan book. When that is considered, all banks' provisioning coverage ratio will not be less than 70 per cent. Therefore, it will not affect the banks' profitability," he added.
O P Bhatt, Chairman of State bank of India said that SBI's provisioning requirement is in line with the norms at around 41-42 percent. Supporting RBI"s step, he said that the rising NPA's made it necessary for banks to increase their provisioning requirements and it should be done when the banks are making profits.