To tackle the NPA or bad assets problem in the banking sector, RBI has designed several mechanisms. An import one among them is the Provisioning norms which is a part of RBI’s prudential regulation.
What is provisioning?
Under provisioning, banks have to set aside or provide funds to a prescribed percentage of their bad assets. The percentage of bad asset that has to be ‘provided for’ is called provisioning coverage ratio.
Provisioning Coverage Ratio (PCR)
Provisioning Coverage Ratio (PCR) is essentially the ratio of provisioning to gross non-performing assets and indicates the extent of funds a bank has kept aside to cover loan losses.
Thus, provisioning coverage ratio is the percentage of bad assets that the bank has to provide for (keep money) from their own funds.
Provisioning should be made on the basis of the classification of assets based on the period for which the asset has remained non-performing and the availability of security and the realisable value thereof.
For example, if the provisioning coverage ratio is 70% for a particular category of bad loans, banks have to set aside funds equivalent to 70% those bad assets out of their profits. Assets of a bank means loans they have given and investment they have made. If the loans are not coming back, there should be provisioning for such bad debts. The assets are classified by the RBI in terms of their duration of non-repayment (NPA, doubtful asset etc.).
The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors.
Provisioning differs with asset quality
In accordance with the prudential norms, provisions should be made on the non-performing assets on the basis of classification of assets into prescribed categories.
Hence, provisioning coverage ratio differs in terms of the quality of assets. Some assets may be lost forever and they are categorized as loss assets. This implies that such loans will never be repaid. For such assets, bank has to set aside 100% of such loss assets. Similarly, there may be substandard assets where the loans are not repaid for a shorter period. In this case, less proportion of those assets can be set aside from profit.
Following table shows the provisioning requirement for various types of assets.
|Asset type||Provisioning requirement|
|Loss assets||Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 % of the outstanding should be provided for.|
|Doubtful assets||(i) Unsecured portion: 100 % of the extent to which the advance is not covered by the realisable value of the security.
(ii) Secured portion: rates ranging from 25 % to 100 % of the secured portion depending upon the period for which the asset has remained doubtful. (25% for upto one year, 40% for 1-3 years and 100% for more than 3 years).
|Substandard assets||A general provision of 15 % on total outstanding should be made.|
|Standard assets||Provisioning from 0.25% for MSME loans to 12.4% for restructured housing sector teaser loans.|