The Reserve Bank of India (RBI) on Monday allowed banks to adjust financial collateral eligible under Basel III capital regulations while providing for fraud accounts.
The central bank said in a notification that while banks should normally provide for the entire amount due to the bank or for which the bank is liable (including in case of deposit accounts) immediately upon a fraud being detected, capital charge for credit risk can be adjusted.
“However, to smoothen the effect of such provisioning on quarterly profit and loss, banks have the option to make the provisions over a period, not exceeding four quarters, commencing from the quarter in which the fraud has been detected,” it said.
It said that where the bank chooses to provide for the fraud over two to four quarters and this results in the full provisioning being made in more than one financial year, banks should debit ‘other reserves’ by the amount remaining un-provided at the end of the financial year by credit to provisions. “However, banks should proportionately reverse the debits to ‘other reserves’ and complete the provisioning by debiting profit and loss account, in the subsequent quarters of the next financial year,” it added.
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