What changed
RBI deferred implementation of paragraph (iv) of its March 25, 2009 circular to FY 2009-10. For FY 2008-09 only, banks now have a choice: either deduct existing floating provisions from gross NPAs to compute net NPAs, or continue to reckon them as Tier II capital subject to the 1.25% of RWA ceiling. Earlier, the March 25 circular had removed the netting option.
What it means for you
Banks get temporary flexibility to manage capital and NPA reporting for FY 2008-09. The deferral supports the G20's procyclicality mitigation agenda, encouraging banks to build floating provision buffers in good times for use during stress. RBI will issue detailed guidelines later in 2009 after FSB/BCBS recommendations.
What you must do
- Decide for FY 2008-09 whether to net floating provisions from gross NPAs or keep them as Tier II capital (within 1.25% of RWA limit).
- Continue building floating provisions as a buffer against future asset quality stress, as encouraged by RBI.
- Monitor RBI's forthcoming detailed guidelines on procyclicality mitigation expected later in 2009.
Who it affects
All scheduled commercial banks (excluding RRBs), Bank treasury and risk management teams, Bank finance and compliance departments
What exactly was deferred?
Paragraph (iv) of the March 25, 2009 circular, which would have removed the option to net floating provisions from gross NPAs, was deferred to FY 2009-10. For FY 2008-09, banks retain the choice.
Can we still use floating provisions as Tier II capital?
Yes, if you choose not to net them from gross NPAs. They can be counted as Tier II capital, but total Tier II from floating provisions cannot exceed 1.25% of total risk-weighted assets.
Is this a permanent change?
No. The choice is only for FY 2008-09. RBI will issue detailed guidelines on procyclicality mitigation later in 2009, which will likely set new rules.