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In a significant step aimed at aiding banks stuck with huge non-performing assets (NPAs), the Reserve Bank of India on Monday allowed them to set aside up to 50 per cent of floating provisions against NPAs from the current level of 33 per cent.
“It has now been decided, as a counter cyclical measure, to allow banks to utilise 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,” the RBI said in a notification.
Under countercyclical provisioning buffers and floating provisions, banks need to set aside a specific amount in good times above the mandatory provisioning requirement as prescribed by RBI. These are used only in contingencies or extraordinary times of economic or system-wide downturns. Following the latest RBI directive, banks can use half of that buffer for provision against bad loans, up from 33 per cent allowed earlier, helping banks to show higher profits in the process.
“In other words, banks can now divert as provision against bad loans a bigger share of this capital cushion. This will boost their profits and balance sheets,” said a banking analyst. Bank shares gained ground on the bourses following the RBI decision.
