What changed
The general provisioning requirement for standard advances was raised from 0.25% to 0.40% of funded outstanding on a portfolio basis. Direct advances to agriculture and SME sectors remain at the old 0.25% rate. The change applies to all scheduled commercial banks except RRBs.
What it means for you
Banks must now set aside more capital for performing loans, reducing net interest income and profitability in the short term. This counter-cyclical measure forces lenders to build cushions during good times, protecting balance sheets when credit quality deteriorates. The exemption for agriculture and SME advances supports priority sector lending without additional cost.
What you must do
- Update provisioning calculations for standard advances to 0.40% immediately.
- Ensure direct agricultural and SME advances continue at 0.25% provisioning.
- Review Tier II capital eligibility for these provisions as per existing norms.
- Communicate the change to credit and risk teams for portfolio impact assessment.
Who it affects
All scheduled commercial banks (excluding RRBs), Credit risk management teams, Finance and provisioning departments, Priority sector lending units (agriculture and SME)
Does this provisioning apply to all standard assets uniformly?
No, direct advances to agriculture and SME sectors are exempt and continue at 0.25%. All other standard advances attract the new 0.40% rate.
Can these provisions be counted as Tier II capital?
Yes, as before, these provisions are eligible for inclusion in Tier II capital for capital adequacy purposes up to the permitted extent.
When does this change take effect?
The circular is dated 4 November 2005 and is effective immediately for all scheduled commercial banks excluding RRBs.