Allows inclusion of technical write-offs while calculating provision coverage ratio. In a relief to a large number of banks such as Canara Bank, the Reserve Bank of India (RBI) has allowed the lenders to include technical write-offs while increasing the provision coverage ratio (PCR) to 70 per cent.
In the second quarter review of the monetary policy, RBI had asked banks to increase the coverage ratio, hitherto left to an individual bank’s discretion, to provide a better buffer for tough times.
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In the guidelines issued late Tuesday evening, the regulator allowed banks to include floating provisions that were not included in Tier-II capital, in addition to provisions for non-performing assets (NPAs), while calculating the PCR.
Bankers had lobbied with the regulator for a simpler dispensation, with the list of demands including an extension of the deadline and inclusion of technical write-offs in the PCR.
A higher PCR without technical write-offs would have resulted in State Bank of India (SBI) providing another Rs 5,000 crore for bad debt by September 2010, while ICICI Bank was required to set aside around Rs 1,700 crore over four quarters. Canara Bank, which had among the lowest of PCRs (27.8 per cent), was required to provide another Rs 1,000 crore. Now, the public sector bank can include the Rs 4,700 crore of technical write-offs while complying with the guidelines.
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The coverage ratio is the ratio of provisions to gross non-performing assets and indicates the extent of funds a lender has to kept aside to cover its loan losses.
Technical or prudential write-offs are the amount of non-performing loans in the books of the branches, but yet to be written off at the head office. RBI said the amount of technical write-offs would have to be certified by statutory auditors.
Senior public sector bank officials said the permission to include write-offs while computing the coverage ratio would reduce pressure on banks. But RBI is silent on how many years of write-offs can be taken into account for computing the NPA coverage ratio.
“If we are expected to take into account only write-offs made in 2009-10 for meeting the 70 per cent norm by September 2010, omitting the write-offs made in previous financial years, it is going to be a tough task,” said a senior bank official.
The impact of the dispensation on SBI is unclear. An SBI executive told Business Standard that the bank needed clarity on treatment of advances under collection account (AUCA). These are NPAs for which full provisions have been made but the bank sees some chance of recovery.
SBI had a provision coverage ratio of 42 per cent at the end of the second quarter. It had made a provision of about Rs 1,900 crore in 2008-09 for NPAs. While ICICI Bank did not respond to a questionnaire, the country’s largest private sector lender had a provision coverage ratio of 55 per cent at the end of September 2009.
Indian Overseas Bank, which had a PCR of 50 per cent at the end of September, would see the ratio increase to over 60 per cent, a senior bank executive said. Dena Bank, which has a PCR of 37.8 per cent, could not be reached for comment.
State-owned Bank of Maharashtra’s current provision coverage ratio was around 46 per cent and the total ratio was around 65 per cent, including technical write-offs, MG Sanghvi, executive director of the bank, said.
“We will try and get close to achieving RBI’s minimum provision coverage ratio by September 2010. There is still time left and we will try to get as close as possible,” he said.