RBI in its recent notice notes some banks have higher provisions than required for meeting non-performing assets.
RBI asks such banks to move these surplus funds towards setting a countercyclical provisioning buffer to be used during downturns.
Please refer to the circular DBOD.No.BP.BC.64/21.04.048 /2009-10 dated December 1, 2009, in terms of which a Provisioning Coverage Ratio (PCR) of 70 percent of gross NPAs was prescribed, as a macro-prudential measure, with a view to augmenting provisioning buffer in a counter-cyclical manner when the banks were making good profits.
Majority of the banks have since achieved the PCR of 70 percent and have been representing to RBI whether the prescribed PCR is required to be maintained on an ongoing basis.
The matter has been examined by us and till such time RBI introduces a more comprehensive methodology of countercyclical provisioning taking into account the international standards as are being currently developed by Basel Committee on Banking Supervision (BCBS) and other provisioning norms, banks are advised that :
i. the PCR of 70 percent may be with reference to the gross NPA position in banks as on September 30, 2010;
ii. the surplus of the provision under PCR vis-a-vis as required as per prudential norms should be segregated into an account styled as “countercyclical provisioning buffer”, computation of which may be undertaken as per the annexed format; and
iii. this buffer will be allowed to be used by banks for making specific provisions for NPAs during periods of system wide downturn, with the prior approval of RBI.
So still we do not have a full fledged countercyclical fund as BIS still working on it. But RBI has gone ahead and asked banks to carve out a fund from their surpluses.
Some lessons for other central banks. They need not really wait for BIS guidelines as they take time and till then risks might just add up. Just prepare banks by asking them to maintain such funds on a smaller scale as of now…Atleast there is a start this way…