Banks can draw more from buffer to cover bad loans - Times of India

The author has posted comments on this articleTNN | Mar 31, 2015, 05.45AM IST

The Reserve Bank of India (RBI) on Monday allowed lenders to use up to 50% of their provisioning buffer at the end of December 2014 for making specific provisions for bad debt or non-performing assets (NPAs), as against the earlier norm of 33%.

NEW DELHI: Banks have won a minor reprieve of sorts at a time when they are grappling with record levels of bad debt and dealing with additional provisioning requirements for loan restructuring.

The Reserve Bank of India (RBI) on Monday allowed lenders to use up to 50% of their provisioning buffer at the end of December 2014 for making specific provisions for bad debt or non-performing assets (NPAs), as against the earlier norm of 33%. This means banks can use more funds from their emergency reserves to provide for NPAs.

The move will come as a relief for several banks, especially those which had increased the provision coverage ratio in response to RBI's calls a few years ago.

"Utilization of countercyclical provisioning buffer/floating provisions under this measure would be over and above the utilization of countercyclical provisioning buffer/floating provisions as permitted ... on Framework for Revitalising Distressed Assets in the Economy (FRDAE) — Refinancing of Project Loans, Sale of NPA and Other Regulatory Measures," RBI said in a notification issued a day before the financial year closes.

From April, RBI has decided to withdraw a special dispensation it had provided some years ago under which the provisioning requirement on restructured loan accounts was pegged at 5%. From next month, the provisioning requirement will rise to 15-20%, depending on whether it's a secured or an unsecured loan. Higher provisioning means that banks will have to set aside more capital to meet potential default risk, which will weigh on their profitability from the next quarter. Although banks had argued that the relaxation should be extended for some more time in the wake of continued distress in the industry, the proposal did not find favour with RBI. Instead, it has offered easier norms to lenders elsewhere.

For provisioning under FRDAE, banks are allowed to sell their NPAs to other banks or NBFCs other than asset reconstruction companies without any initial holding period. But, banks have to use their buffer for provisions towards bad loans with prior approval from the regulator.

Banks are allowed to utilize this buffer for additional provisions for financial distress, prompt steps to resolve it, and fair recovery for lenders and investors.

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