The Reserve Bank of India (RBI) relaxed the provisioning norms for banks with retrospective effect from September 30, 2010, which in turn could help banks post higher profits. The RBI said, banks will have to maintain a provision coverage ratio of 70 percent of their gross bad loans only till September 30, 2010 after which they will have to follow just the standard capital provisioning requirement as per by the Basu committee. Under the present provisioning norms, banks have to maintain funds ranging from 10 perecent for sub-standard assets to 100 percent for assets under ‘loss category’.
In December 2009, the RBI had come out with an additional provisioning norm of 70 percent of gross bad loans, which was known as the provision coverage ratio, with a view to augment provisioning buffer in a counter-cyclical manner when banks were making good profits.
This norm was above the existing capital provisioning norms there by eating into banks’ profits.
The RBI has now said that the surplus of the provisions under the provision coverage ratio should be kept in a separate account known as the counter-cyclical provisioning buffer.
Banks will be able to draw from this buffer for making specific provisions for their non-performing assets during a period of downturn with the prior approval of RBI.
The RBI added, majority of banks have already achieved a provision coverage ratio of 70 percent.