RBI Provisioning Norms --Part 1: Standard assets - Finance Ppl

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RBI Provisioning Norms --Part 1: Standard assets

Background:
RBI releases a Master Circular on norms on Income Recognition, Asset Classification and Provisioning, on yearly basis consolidating the circulars issued on the matter during the previous Fiscal year.
Latest being Master circular RBI/2024-25/12 dated April 02, 2024.

In this article, we shall read about the latest provision norms prescribed with respect to Standard assets, in the latest Master circular released that consolidates all instructions in this regard issued up to March 31, 2024.

What is a Standard Asset:
Standard asset is an asset that not have any problem with regard to their collectability and which doesn’t show signs of any risk apart from usual inherent risk attached to business.

Provision for standard assets: Bank should also make a general provision for standard assets, on the amount outstanding, out of the funds given as advance (on loan portfolio basis)

Following are the provision rates prescribed by RBI for Standard assets

Advance type

Provision % outstanding balance

(RBI norms)

Farm Credit to agricultural activities

0.25%

loans to Small and Micro Enterprises (SMEs) sectors

0.25%

Loan to medium enterprises

0.40%

advances to

a) Commercial Real Estate

b) Commercial Real Estate-Residential housing

c) Individual housing loans

d) housing loan at teaser rates

 

1%

0.75%

0.25%

2%

Advances restructured and classified as standard

5%

restructured advances

as stipulated in the prudential norms for restructuring of advances

All other loans and advances other than the above

0.40%

Special points:
a) Provisions on standard assets should not be considered, for arriving at amount of Net NPAs.
b) Provision must disclosed in the B/S as 'Contingent Provisions against Standard Assets' under Other Liabilities and Provisions Others.  
c) This provision should not be netted of against gross advance. 

Currency Volatility and provisions: 
In case where the borrower has unhedged foreign currency exposures, the probability of default is very high in times of extreme currency volatility.  Accordingly, banks have to make an estimate of riskiness of the unhedged position & make an incremental provision as prescribed by RBI, in respect of advances to those borrowers.
Incremental provision requirements:

Calculate (Likely loss / EBID*) expressed in %

Incremental provision (in BPS**)

Upto 15%

0

>15% - < 30%

20 bps

>30% - < 50%

40 bps

>50% - < 75%

60 bps

>75%

80 bps

 

*For this purpose EBID=PAT+ Depreciation +Interest +Lease rental

**One basis point is equivalent to 0.01%


Rule Additional Provision at higher than prescribed rates
Rates prescribed are regulatory minimum and banks can provide at higher rates, based on their evaluation of advances given to stressed sectors of economy. 
In order to arrive at such higher rates, RBI advises banks 
a) To devise board–approved policy which shall be observed while making such higher provisions.
b) There should be periodic review of, performance of the sectors that forms part of the bank's advance exposure. This is performed to evaluate the current and probable risk of the loan falling to NPA. This review shall be performed at least quarterly.
c) The parameters must include evaluation of ratios, industry performance & future outlook, regulatory issues faced by the respective sector, identifying sector wise stressed assets and other parameters specific to those sectors .