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RBI alters NPA coverage norms
The RBI had mandated the banks to achieve a provision coverage ratio of 70% on gross
NPAs, including floating provisions, by September 30, 2010. Consequently, most banks
have achieved the same except for SBI, UCO Bank, IOB and Bank of Maharashtra. The RBI
on Friday prescribed that the 70% calculation has to be based on gross NPA position as of
September 30, 2010, instead of the date when the calculation is being done. These norms
are to be followed by banks until the RBI introduces a more comprehensive methodology
of counter-cyclical provisioning, taking into account the international standards as are
being currently developed by Basel Committee on Banking Supervision (BCBS) and other
provisioning norms. This step is expected to benefit those banks whose gross NPAs have
increased since then. The likely beneficiaries on this count include PNB, OBC, UCO Bank,
SBI and Syndicate Bank.
The circular also states that the surplus of the provisioning required under 70% PCR
vis-à-vis that required as per prudential norms should be segregated into an account styled
as ‘counter-cyclical provisioning buffer’, which will be allowed to be used by banks for
making specific provisions for NPAs during periods of system-wide downturn, with the prior
approval of the RBI. We believe the move is more favourable for banks than the earlier
floating provision route as this counter-cyclical provisioning buffer is expected to be more
flexible in terms of its utilisation and, hence, banks will be incentivised to provide more in
good times and create sufficient cushion for unexpected credit risks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RBI alters NPA coverage norms
The RBI had mandated the banks to achieve a provision coverage ratio of 70% on gross
NPAs, including floating provisions, by September 30, 2010. Consequently, most banks
have achieved the same except for SBI, UCO Bank, IOB and Bank of Maharashtra. The RBI
on Friday prescribed that the 70% calculation has to be based on gross NPA position as of
September 30, 2010, instead of the date when the calculation is being done. These norms
are to be followed by banks until the RBI introduces a more comprehensive methodology
of counter-cyclical provisioning, taking into account the international standards as are
being currently developed by Basel Committee on Banking Supervision (BCBS) and other
provisioning norms. This step is expected to benefit those banks whose gross NPAs have
increased since then. The likely beneficiaries on this count include PNB, OBC, UCO Bank,
SBI and Syndicate Bank.
The circular also states that the surplus of the provisioning required under 70% PCR
vis-à-vis that required as per prudential norms should be segregated into an account styled
as ‘counter-cyclical provisioning buffer’, which will be allowed to be used by banks for
making specific provisions for NPAs during periods of system-wide downturn, with the prior
approval of the RBI. We believe the move is more favourable for banks than the earlier
floating provision route as this counter-cyclical provisioning buffer is expected to be more
flexible in terms of its utilisation and, hence, banks will be incentivised to provide more in
good times and create sufficient cushion for unexpected credit risks.
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