RBI asks banks to create buffer for bad loans

The Reserve Bank of India has asked banks to create special buffers to be used for making specific provisions for bad loans during periods of system-wide downturn. The RBI wants the buffer styled as countercyclical provisioning buffer to be set up out of any surplus provision available after complying with stipulated 70 per cent provision of coverage ratio PCR of the gross non performing assets as on September 2010.

RBI issued a notification on Friday to enforce the norms. The surplus of the provision under PCR vis-a-vis as required as per prudential norms should be segregated into an account computation of which may be undertaken as per the format prescribed by the RBI, said the notification. Bankers have welcomed the new move. S Raman,CMD,Canara Bank said,Our PCR currently is 74 per cent,which is more than the RBI requirement. Hence we have already started creating a buffer as per the RBI guideline. It is basically in the context of Basel III requirements.

In fact,Basel III requires more aggressive capital provisioning,particularly when it is going good for the banks.