RBI provides more provisioning buffer for banks

The Reserve Bank of India (RBI) eased norms on countercyclical provisioning buffer/floating provisions for non-performing assets (NPAs) for banks. A notification, released on Monday, specified that the central bank allowed banks to use half of floating provisions for specific NPAs compared with one-third earlier. 

The financial industry has been mired by rising NPAs or bad loans which has hurt the profitability of banks while making them averse to lending. Despite the two cuts provided by the RBI this year, banks have not cut loan rates. The alteration to countercyclical provisioning buffer/floating provisions is a move by the RBI to ensure that the banks start lending again by covering their losses. 

Banks’ NPAs have risen significantly over the last year as weak economic growth has hurt the prospects of Indian corporates. According to a statement issued at the Parliament by Minister of State for Finance Jayant Sinha, NPAs involving top 10 defaulters amounted to Rs 28,152 crore as of December 20114, which is 1.73 per cent of total loans.

Moreover, this is the second time that RBI has raised the limit on countercyclical provisioning buffer/floating provisions for NPAs. In a note released on February 7, the central bank had altered the limit to 33 per cent.

"It has now been decided, as a counter cyclical measure, to allow banks to use up to 50 per cent of countercyclical provisioning buffer/floating provisions held by them as at the end of December 31, 2014, for making specific provisions for non-performing assets, as per the policy approved by their board of directors," RBI said.

RBI has been trying to limit rising NPAs. Earlier this month, the central bank along with SEBI, liberalised norms allowing banks to convert debt to equity to ease pressure on the financial industry. 

With the government aiming to improve the economy and open up new channels of credit, it is important that the health of banking industry improves first. RBI tightened norms for non-banking financial companies (NBFCs) on Friday directing the financial institutions to get themselves rated before March 2016.

(Edited by Joby Puthuparampil Johnson)

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