RBI's NEW LOAN PROVISION NORMS TO HELP BANKS IMPROVE FINANCI

anthony (Finance) (7918 Points)

26 March 2009  

In a move that will help improve the financial health of banks, the Reserve Bank of India On Wednesday issued fresh norms for the treatment of provisions for restructured accounts, standard assets, and non-performing assets (NPAs). The new norms are expected to improve capital adequacy and bring down the level of net NPAs. Under the revised norms, the banks can use the provisions made for decline in the fair value of restructured advances (standard assets and NPAs) for netting from relative assets. The amount used for provisioning could be reduced from the outstanding advance. For example, for an account having a Rs 100-crore loan with a provision of Rs 10 crore, the bank exposure stands reduced to Rs 90 crore. The chief financial officer of a Mumbai-based public sector bank said that banks have been allowed to restructure accounts, which face temporary cash flow problems due to the slowdown. The new norms will mean lower risk-weighted assets and lesser provision for loans. On the use of floating provisions, RBI said they can be counted as part of Tier-II capital. This can proportionately reduce the need for raising additional capital for banks that have such provisions in books. The overall ceiling for this has been set at 1.25 per cent of the total risk-weighted assets. Also, banks can now use the additional provisions (more than required by regulations) for bad loans to arrive at their net NPAs. Earlier, banks could only use the minimum regulatory provision for calculating net positions. An official with a Bangalore-based public sector bank said this would reduce the level of NPAs, an important indicator of financial health. The central bank said that, when the proceeds from the sale of standard assets is higher than book value, a bank can credit the excess amount to profit and loss account. This step is expected to boost profit at a time when interest income has moderated and contributions from the treasury income are down, a Bank of India official. Finally, RBI has permitted banks to consider the excess provisioning from the sale of NPAs to be used for capital adequacy of Tier-II bonds.