RBI/2008-09/429
DBOD.No.BP.BC. 122 /21.04.048/2008-09
April 9, 2009
The Chairman & Managing Directors/ Chief Executive Officers
All Scheduled Commercial Banks
(Excluding RRBs)
Dear Sir
Prudential treatment in respect of Floating Provisions
Please refer to our circular DBOD.No.BP.BC.118 /21.04.048/2008-09 dated March
25, 2009 regarding prudential treatment of different types of provisions in
respect of loan portfolios in terms of which banks have been advised that
Floating Provisions cannot be netted from gross NPAs to arrive at net NPAs, but
could be reckoned as part of Tier II capital subject to the overall ceiling of
1.25% of total Risk Weighted Assets.
- Banks are aware that the Leaders of Group of Twenty met in London on April 2,
2009 and declared the Global Plan for Recovery and Reform and declaration on
strengthening the financial system. The Group agreed to take several measures to
strengthen international frameworks for prudential regulations and has asked
that the Financial Stability Board (FSB), Basle Committee of on Banking
Supervision (BCBS) and Committee on Global Financial System (CGFS), working with
accounting standard setters, should take forward, with a deadline of end 2009,
implementation of the recommendations to mitigate procyclicality, including a
requirement for banks to build buffers of resources i.e capital and provisions
in good times that they can draw down when conditions deteriorate. This position
would modify instructions on use of floating provisions contained in our
circular DBOD.BP.BC.89/21.04.048/2005-06 dated June 22, 2006.
- While FSB, BCBS and CGFS will be working out detailed measures to mitigate procyclicality in due course and RBI would also continue to take measures to
mitigate procyclicality, it is necessary that banks do realize the importance of
building buffers such as floating provisions in good times so that they are able
to use these in adverse circumstances. Therefore, banks are encouraged to build
floating provisions as a buffer for the possible stress on asset quality later.
Reserve Bank will issue detailed guidelines on mitigating procyclicality later
this year after FSF, BCBS and CGFS finalize their recommendations in this
regard.
- It has been decided to defer the implementation of para (iv) of the circular
dated March 25, 2009 ibid to the year 2009-10. Accordingly, banks will have the
choice between either deducting their existing floating provisions from Gross
NPAs to arrive at net NPAs or reckoning it as part of Tier II capital subject to
the overall ceiling of 1.25% of total Risk Weighted Assets. It may be noted that
this choice is limited to the financial year 2008-09 only.
Yours faithfully
(Prashant Saran)
Chief General Manager-in-Charge