‘NPAs: Banks need more provisioning’: 

‘NPAs: Banks need more provisioning’

Context

A joint report by Assocham and rating agency Crisil says “Banks may require an incremental provisioning of 20% against cumulative debt of 50 large stressed assets worth over Rs. 4.3 lakh crore”.

Introduction:

  • These 50 large accounts are from the sectors such as construction, power and metals, among others and constitute about half of the gross none—performing assets of the banking sector.

Banking provisions for NPA’s

  • The banking regulator formed an IAC (Internal Advisory Committee) which in its first meeting selected 12 large corporate loan accounts which can be immediately referred to the NCLT (National Company Law Tribunal) for resolution.
  •  It is also examining the top 50 accounts with an exposure of over Rs 500 and 60 percent of the loan amount has been classified as non-performing asset (NPA).
  • As per the RBI’s provisioning norms, if an account turns into an NPA, banks are required to set aside 15 percent of the loan amount as provisioning in the first year.
  • The provisioning rises to 25 percent in the second year and 40 percent in the third year. After the third year, banks are required to make 100 percent provisioning against the loan.
  • The IAC also recommended that banks should finalise a resolution plan for the 12 and other corporate accounts being filed to NCLT and within six to nine months if a viable resolution plan is not agreed upon, banks should initiate insolvency proceedings under the Insolvency and Bankruptcy code (IBC).

Conclusion

While banks may have already provisioned for a part of these exposures, they need to adequately capitalise to absorb such losses which could fuel credit growth and support the next leg of economic growth.

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