RBI favours dynamic provisioning norms

The Reserve Bank of India (RBI), on Friday, said that there was a need for introducing a comprehensive provisioning framework for banks in India with dynamic and countercyclical elements. The discussion paper, Introduction of dynamic provisioning framework for banks in India, which was released here on Friday for comments, reviews present provisioning practices of Indian banks. At present, banks generally make two types of provisions, namely, general provisions on standard assets and specific provisions on non-performing assets (NPAs). Since the level of NPAs varies through the economic cycle, the resultant level of specific provisions also behaves cyclically. Consequently, lower provisioning during upturns, and higher provisioning during downturns have pro-cyclical effect on the real economy. “To address pro-cyclicality of capital and provisioning, after the financial crisis, efforts at international level are being made to introduce countercyclical capital and provisioning buffers,” the RBI added. The RBI said that the present provisioning policy has several drawbacks, including the rate of standard asset provisions has not been determined based on any scientific analysis or credit loss history of Indian banks. Floating provisions Further, it said that banks made floating provisions at their own will without any pre-determined rules and not all banks made floating provisions. It makes inter-bank comparison difficult. The present provisioning framework does not have countercyclical or cycle smoothening elements. Though the RBI has been following a policy of countercyclical variation of standard asset provisioning rates, the methodology has been largely based on current available data and judgement, rather than on an analysis of credit cycles and loss history. Keywords: Reserve bank of India, provisioning norms, non-performing assets