In a major relief to the banking sector, the Reserve Bank of India said that banks need not make any provisions for the loss in present value (PV) terms for moneys receivable only from the government of India, for the accounts covered under the debt waiver scheme and the debt relief scheme.
Further, it noted that the Centre will pay interest to banks at 364 days treasury bill rate on the unpaid amount towards the farm debt waiver scheme, amounting to Rs 60,000 crore.
?The Centre has since decided to pay interest on the 2nd, 3rd, and 4th instalments, payable by July 2009, July 2010, and July 2011 respectively, at the prevailing yield to maturity rate on 364-day government of India treasury bills. The interest will be paid on these instalments from the date of the reimbursement of the first installment, which is November 2008, till the date of the actual reimbursement of each installment,? said the central bank in a statement.
Speaking to FE, Bank of Baroda official said that this move would benefit the bank and help to maintain profitability. The cash flows should be discounted with effect from June 30, 2008, being the date when the debt waiver or debt relief scheme came into effect. The provisions held by the banks on PV basis and the excess provisions, if any, can not be treated as general provisions and have to be treated as asset specific provisions just like the provisions for NPAs.
The central bank also said that the provisions held by the banks on PV basis and the excess provisions, if any, in respect of the amount receivable from the GOI, may be netted against the relative advances as also from the gross NPAs, and the net amount receivable from the GOI should be shown as part of the ?advances? in the balance sheet.
The provisions made on PV basis and the excess provisions, if any, would not be eligible for inclusion in Tier II capital. However, the provisions made for ?standard? classification of the amount receivable from the GOI (in case of Debt Relief), should not be netted off from advances but would be reckoned as part of the Tier II capital of the banks , within the extant ceiling of 1.25% of the risk weighted assets.
The provisions on PV basis are required to be made in respect of all the instalments receivable from the Government of India – including the first instalment – even though the amount receivable is classified as standard.
The banks may make the provisions on PV basis, if they so desire, in three equal instalments over the three quarters ending September 30, 2008, December 31, 2008, and March 31, 2008. The amount of provisioning however would remain unchanged.