The Telegraph
Since 1st March, 1999
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Provisioning for NPAs to be higher

Calcutta, April 29: The Reserve Bank (RBI) has asked banks to build up provisions significantly above the minimum regulatory requirements for their non-performing assets especially for assets they propose to sell to securitisation/reconstruction companies.

Higher provisioning for NPAs may result in lower profitability for the banks, bankers said.

In the monetary and credit policy for 2003 announced here today, the RBI states that the banks would be able to sell their NPAs to securitisation/reconstruction companies at a considerable discount and the resultant shortfall, if any, in the net book value after deducting provisions held, would be debited to the profit and loss account.

Senior bankers said, “First, the shortfall has to be debited to the profit and loss account of banks. For this, banks have to make higher provisions, which will in turn affect their profitability. This will be a trying exercise for banks particularly at a time when the industrial slowdown and the impact of liberal trade threatens to increase bad loans.”

At present, banks in India make a 48–50 per cent provisioning of its NPAs. “This will become substantially higher following this instruction from the apex bank,” the bankers added.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, allows securitisation/reconstruction companies created under the Act to purchase NPAs from the banks.

To facilitate the sale of assets, the central bank has already announced guidelines for banks and financial institutions.

The credit policy has also asked banks to place the scheme of prompt corrective action (PCA) before their boards and take necessary steps to ensure they do not come within the scope of PCA.

The RBI had come up with a PCA framework in December 2002 with the approval of Board for Financial Supervision.

According to the scheme, the RBI would initiate structured action for banks that have hit the trigger point in terms of capital to risk-weighted assets ratio (CRAR), net non-performing assets and return on assets.

The apex bank, at its discretion, would also resort to additional discretionary actions under each of the trigger points.

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