What changed
RBI clarified the definition of 'extra-ordinary circumstances' under which banks can use floating provisions for specific provisions. These circumstances are now categorized into General (e.g., civil unrest, natural calamities, pandemics), Market (e.g., systemic market meltdown), and Credit (only exceptional credit losses). Banks must have board-approved policies aligned with these parameters.
What it means for you
Banks cannot dip into floating provisions for routine credit losses or standard business fluctuations. This ensures floating provisions remain a buffer for truly rare, systemic shocks. Lenders must tighten internal policies to distinguish between ordinary and extraordinary losses, and seek RBI approval before using these provisions.
What you must do
- Review and update board-approved policies on floating provisions to align with the three defined categories of extraordinary circumstances.
- Ensure any use of floating provisions for specific provisions is pre-approved by the board and prior RBI permission is obtained.
- Train credit and risk teams to identify and document losses that qualify as extraordinary under the General, Market, or Credit categories.
- Maintain clear audit trails for any utilization of floating provisions to demonstrate compliance with RBI norms.
Who it affects
All Scheduled Commercial Banks (excluding RRBs), Bank boards and risk management committees, Credit and provisioning teams
Can we use floating provisions for a spike in NPAs due to a sector downturn?
No, unless the downturn qualifies as an extraordinary, non-recurring event like a systemic market meltdown. Routine sectoral stress is not covered.
Do we need RBI approval every time we want to use floating provisions?
Yes, prior permission from RBI is mandatory, along with board approval, even if the loss falls under the defined extraordinary categories.