RBI Spruces Up Provisioning Norms In Line With Global Best Practices

Mumbai, April 29: | Updated: Apr 30 2002, 05:30am hrs
Upgrading prudential measures for the banking industry, the Reserve Bank of India on Monday said that with effect from March 2005, an asset would be classified as doubtful if it remained in the sub-standard category for 12 months.

Banks are permitted to phase the consequent additional provisioning over a four-year period, with a minimum 20 per cent each year. The move is in tandem with the recommendations of Narsimham Committee II and with a view to moving closer the to international best practices.

Also continuing its initiative on corporate debt restructuring (CDR), the central bank as an interim measure, and pending recommendation of the high level group constituted by the RBI, has decided that permission for debt restructuring will be made available by RBI on the basis of specific recommendations of CDR “core-group”, if a minimum of 75 per cent of the lenders constituting banks and financial institutions (FIs) consent for CDR, irrespective of differences in classification of the assets by banks/FI. RBI had constituted a high level group under the chairmanship of deputy governor Vepa Kamesam to review the operations of the CDR scheme to identify the operational difficulties, if any, in smooth implementation of the schemes and to suggest measures to make the scheme even more effective. Also, on the basis of feedback, it is decided that Investment Fluctuation Reserve should be computed with reference to investments in two categories “Held for Trading” and “Available for Sale” It will not be necessary to include the investment under “Held to Maturity” category for purposes of computation of IFR The central bank said that an internal group would invite representatives from select banks to provide inputs into the development of the modified approach as well as the upcoming Quantitative Impact Study. Banks are expected to constitute an expert internal team to study the methodology of the new proposals and its likely impact.

The RBI will shortly issue draft guidelines on the country risk management and provisioning therefore in consultation with banks, Indian Banks Association and other market participants.

The central bank has advised the banks to study the Basel framework on capital for market risk as envisaged in Amendment to the Capital Accord to incorporate market risks published in January 1996.

Speaking to he Financial Express, State Bank of India chairman Janki Ballabh said that by the new set of prudential measures the cental bank is preparing the banking system to switch over to the international standard on non-performing assets, income recognition and asset classification.

“The scenario on NPA front will be quite different when the interest is charged on monthly basis”, Mr Ballabh said.