RBI allows banks to use one-third of its counter-cyclical buffer to cover bad loans

KOLKATA: Reserve Bank of India allowed banks to utilise up to one-third of the countercyclical provisioning buffer held by them during last fiscal for making specific provisions to cover spiralling bad loans.

Making provisions against bad loans reduces banks’ net profit and this move would help banks to use its existing buffer without making fresh provisions to that extent.

The sector regulator has proposed building up of counter-cyclical capital buffer by setting aside up to 2.5% of the risk weighted assets, based on the credit-to-GDP ratio and growth in gross non performing assets of banks.

It has also told banks to build up 70% provisioning coverage ratio as a prudential measure, with a view to augmenting provisioning buffer in a counter-cyclical manner when the banks were making good profits.

As a large number of companies are under stress amid an economic slowdown, NPA in te banking system has seen increase and restructured accounts has risen sharply.

The financially distressed assets produce less economic wealth and thet also deteriorate quickly in value. Therefore, there is a need to ensure that the banking system recognises financial distress early, takes prompt steps to resolve it, and ensures fair recovery for lenders and investors.