Provisioning Coverage Ratio for Advances

Provisioning Coverage Ratio for Advances

RBI/2010-11/485

DBOD.No.BP.BC. 87/21.04.048/2010-11

April 21, 2011

The Chairman and Managing Director/ Chief Executive Officer

All Scheduled Commercial Banks

(Excluding RRBs)

Dear Sir/ Madam

Provisioning Coverage Ratio (PCR) for Advances

Please refer to the circular DBOD.No.BP.BC.64/21.04.048/2009-10 dated December 1, 2009, in terms of which a Provisioning Coverage Ratio (PCR) of 70 percent of gross NPAs was prescribed, as a macro-prudential measure, with a view to augmenting provisioning buffer in a counter-cyclical manner when the banks were making good profits.

2. Majority of the banks have since achieved the PCR of 70 percent and have been representing to RBI whether the prescribed PCR is required to be maintained on an ongoing basis.

3. The matter has been examined by us and till such time RBI introduces a more comprehensive methodology of countercyclical provisioning taking into account the international standards as are being currently developed by Basel Committee on Banking Supervision (BCBS) and other provisioning norms, banks are advised that  :

1. the PCR of 70 percent may be with reference to the gross NPA position in banks as on September 30, 2010;
2. the surplus of the provision under PCR vis-a-vis as required as per prudential norms should be segregated into an account styled as “countercyclical provisioning buffer”, computation of which may be undertaken as per the annexed format; and
3. this buffer 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 RBI.

4. Some of the banks that had been granted extension of time beyond the stipulated date i.e. September 30, 2010 for achieving the PCR of 70 percent on their request, should calculate the required provisions for 70 percent PCR as on September 30, 2010 and compute the shortfall therefrom. This shortfall should be built up at the earliest and these banks should reassess the further time required beyond March 31, 2011, if any, to build up the buffer and seek approval from RBI.

5. As hitherto, the PCR should be disclosed in the Notes to Accounts to the Balance Sheet.

Yours faithfully

(B. Mahapatra)

Chief General Manager-in-Charge

Annex

Format for Computing Countercyclical Provisioning Buffer

_________

Note : circular DBOD.No.BP.BC.64/21.04.048/2009-10 dated December 1, 2009 is mentioned below

Provisioning Coverage for Advances - Second Quarter Review of Monetary Policy for the Year 2009-10

RBI/2009-10/241

DBOD.No.BP.BC. 64 /21.04.048/2009-10

December 1, 2009

The Chairman and Managing Director / Chief Executive Officer

All Scheduled Commercial Banks

(Excluding RRBs)

Dear Sir,

Second Quarter Review of Monetary Policy for the

Year 2009-10 –Provisioning Coverage for Advances

Please refer to paragraph 159 of the Second Quarter Review of the Monetary Policy for the year 2009-10 issued on October 27, 2009 (copy of the paragraph enclosed).

2. At present, the provisioning requirements for NPAs range between 10 per cent and 100 per cent of the outstanding amount, depending on the age of the NPAs and the security available. Banks can also make additional specific provisions subject to a consistent policy based on riskiness of their credit portfolios, because the rates of provisioning stipulated for NPAs are the regulatory minimum. It has been observed that there is a wide heterogeneity and variance in the level of provisioning coverage ratio across different banks.

3. As you are aware currently there is a realisation from a macro-prudential perspective that banks should build up provisioning and capital buffers in good times i.e. when the profits are good, which can be used for absorbing losses in a downturn. With this in view, there is a need for improving the provisioning cover as the banking system is currently making good profits. This will enhance the soundness of individual banks, as also the stability of the financial sector. It has therefore been decided that banks should augment their provisioning cushions consisting of specific provisions against NPAs as well as floating provisions, and ensure that their total provisioning coverage ratio, including floating provisions, is not less than 70 per cent.

4. Provisioning Coverage Ratio (PCR) is essentially the ratio of provisioning to gross non-performing assets and indicates the extent of funds a bank has kept aside to cover loan losses. Banks are advised to compute the PCR as per the annexed format.

5. Banks should achieve this norm not later than end-September 2010. Also, the PCR should be disclosed in the Notes to Accounts to the Balance Sheet.

Yours faithfully

(B. Mahapatra)

Chief General Manager

Paragraph 159 of the Second Quarter Review

of the Monetary Policy for the year 2009-10

At present, the provisioning requirements for NPAs range between 10 per cent and 100 per cent of the outstanding amount, depending on the age of the NPAs, the security available and the internal policy of the bank. Since the rates of provisioning stipulated by the Reserve Bank for NPAs are the minimum and banks can make additional provisions subject to a consistent policy based on riskiness of their credit portfolios, it has been observed that there is a wide heterogeneity and variance in the level of provisioning coverage ratio across different banks. With a view to improving the provisioning cover and enhancing the soundness of individual banks, it is proposed to advise banks to augment their provisioning cushions consisting of specific provisions against NPAs as well as floating provisions, and ensure that their total provisioning coverage ratio, including floating provisions, is not less than 70 per cent. Banks should achieve this norm not later than end-September 2010.

Annex

Format for computing Provisioning Coverage Ratio (PCR)

Rs. in Crores