Banks should augment their provisioning cushions consisting of specific provisions against NPAs as well as floating provisions, and ensure that their total provisioning coverage ratio (PCR), including floating provisions, is not less than 70%, the Reserve Bank of India (RBI) said on Tuesday.
The PCR is essentially the ratio of provisioning to gross non-performing assets (NPAs) and indicates the extent of funds a bank has kept aside to cover loan losses.
Banks are advised to compute the PCR as per the prescribed format, the RBI said in a notification.
Banks should achieve this norm not later than the end of September 2010, the RBI said. Also, the PCR should be disclosed in the Notes to Accounts to the Balance Sheet, it added.
At present, the provisioning requirements for NPAs range between 10% and 100% of the outstanding amount, depending on the age of the NPAs and the security available. Banks can also make additional specific provisions subject to a consistent policy based on risks associated with their credit portfolios, because the rates of provisioning stipulated for NPAs are the regulatory minimum.
It has been observed that there is a wide heterogeneity and variance in the level of provisioning coverage ratio across different banks, the RBI said.
There is a realisation from a macro-prudential perspective that banks should build up provisioning and capital buffers in good times i.e. when the profits are good, which can be used for absorbing losses in a downturn.
With this in view, there is a need for improving the provisioning cover as the banking system is currently making good profits, the RBI said. This will enhance the soundness of individual banks, as also the stability of the financial sector, it added.