What changed
RBI issued guidelines specifying how different types of provisions on loan portfolios should be treated prudentially. Additional provisions for NPAs at higher than prescribed rates can be netted from gross NPAs but cannot be included in Tier II capital. Excess provisions from sale of NPAs can be admitted as Tier II capital subject to a ceiling of 1.25% of total risk-weighted assets. Provisions for diminution of fair value of restructured advances can be netted from the relative asset.
What it means for you
Urban cooperative banks can now voluntarily set aside extra provisions for NPAs beyond regulatory minimums, which helps in reflecting actual losses but does not boost capital ratios. The ability to use excess provisions from NPA sales as Tier II capital provides a limited capital relief. Netting provisions for fair value diminution from restructured assets improves balance sheet transparency.
What you must do
- Review board-approved policies for additional NPA provisions to ensure consistency and alignment with estimated actual losses.
- Ensure additional specific provisions for NPAs are netted from gross NPAs but excluded from Tier II capital calculations.
- Monitor excess provisions from NPA sales and admit them as Tier II capital only up to 1.25% of total risk-weighted assets.
- Net provisions for diminution of fair value of restructured advances from the relative asset in financial statements.
Who it affects
All Primary (Urban) Cooperative Banks, Board of Directors of urban cooperative banks, Risk management and finance teams
Can additional NPA provisions be counted as Tier II capital?
No, additional specific provisions for NPAs at higher than prescribed rates cannot be reckoned as Tier II capital, though they can be netted from gross NPAs to arrive at net NPAs.
What is the limit for admitting excess provisions from NPA sale as Tier II capital?
Excess provisions from sale of NPAs can be admitted as Tier II capital subject to an overall ceiling of 1.25% of total risk-weighted assets.
How should provisions for diminution of fair value of restructured advances be treated?
Provisions for diminution of fair value of restructured advances, whether for standard assets or NPAs, are permitted to be netted from the relative asset.