Banks to increase NPA coverage to 70 percent

By SiliconIndia   |   Wednesday, October 28, 2009
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Mumbai: The banks will have to increase their provisioning coverage for net Non Performing Assets (NPA) to 70 percent, which will also include floating provisions. In the Q2 review of Monetary Policy 2009-10, the RBI has set a deadline of September 2010 for banks to achieve the target. But the RBI has said that it may extend the deadline following the requests by bankers. "With a view to improving the provisioning cover and enhancing the soundness of individual banks, it is proposed to advise banks to augment their provisioning cushions consisting of specific provisions against NPAs as well as floating provisions, and ensure that their total provisioning coverage ratio, including floating provisions, is not less than 70 percent," said RBI. The provisioning requirements for NPAs range between 10 percent and 100 percent of the outstanding amount at present, depending on the age of the NPAs, the security available and the internal policy of the bank, said RBI. RBI Deputy Governor, Usha Thorat, said that the move is a buffer and a cushioning measure. The level of coverage would vary from bank to bank because of the different types of NPAs. "Overall, the feeling is that this is the time when one can increase the buffers that can be utilized in a better manner when they are really required," said Usha. "The idea that is gaining ground is pro cyclicality provide more when profits are good for the worse times that may follow," said MV Nair, Chairman, Indian Banks' Association and Chairman and Managing Director, Union Bank of India. AC Mahajan, Chairman and Managing Director, Canara Bank, said that when written-off assets are considered, all banks' provisioning coverage ratio will be above 70 percent. "The written-off assets are not abandoned advances, but are a part of our loan book. When that is considered, all banks' provisioning coverage ratio will not be less than 70 percent. Therefore, it will not affect the banks' profitability," said Mahajan. "Our coverage ratio is 53 percent. We have to increase it to 70 percent by next year. We have asked the RBI to give us some more time or give us some scientific way of doing it," said S.K. Goel, Chief Managing Director, UCO Bank. For State Bank of India, OP Bhatt, Chairman, said that the provisioning coverage is generally less than 40 percent. "Our provisioning requirement, according to the norms, is around 41-42 percent. This means that we have got a higher percentage of our NPAs in the recoverable or upgradable class. We have also seen that there is large portion of our assets that slides into sub-standard category, but improves and moves into standard again. Most of this is in housing loans," said Bhatt, adding that the RBI may revisit the issue following the discussion with bankers.
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