The Reserve Bank of India on Wednesday said what is being set aside for NPAs above the regulatory norms would be treated as a kind of capital for banks in order to facilitate more provisioning for non-performing assets.
Banks have been wary of making extra provisions for non-performing assets (NPAs) because at present they are not treated as capital and cannot be credited to the profit and loss account. Rather they are treated as floating provision (funds that banks maintain in excess of their normal provisions for standard and bad assets),which can be used only at the time of severe contingencies.
However,the banking regulator has clarified that excess provisions can be treated as tier II capital subject to the overall ceiling of 1.25 per cent of the total risk-weighted assets provided it is approved by the board of banks,the apex bank said in a notification.
Besides,the additional provision for NPAs maybe subtracted from gross NPAs to arrive at the net,which will have an implication on the balance sheets of the banks.
While floating provisions cannot be netted from gross NPAs to arrive at net NPAs,it is clarified that they could be reckoned as part of tier II capital subject to the overall ceiling of 1.25% of total risk weighted assets.