What changed
RBI had earlier directed that from FY 2009-10, floating provisions could no longer be netted from gross NPAs to arrive at net NPAs. Now, citing ongoing global work on counter-cyclical provisioning by FSB, BCBS, and CGFS, RBI has deferred that change until further notice. Banks retain the existing flexibility to either net floating provisions from gross NPAs or count them as Tier II capital.
What it means for you
Banks get continued relief on capital and NPA reporting flexibility. They can keep using floating provisions to reduce reported net NPAs, which helps manage asset quality perception. The deferral also means Tier II capital treatment remains optional, not mandatory, giving banks room to optimize capital ratios until global norms are finalized.
What you must do
- Continue to treat floating provisions as per existing options: net from gross NPAs or include in Tier II capital up to 1.25% of RWA.
- Monitor RBI's future circulars on counter-cyclical provisioning for eventual changes.
- Review your bank's current treatment of floating provisions and ensure compliance with the 1.25% ceiling if opting for Tier II capital inclusion.
Who it affects
All scheduled commercial banks (excluding RRBs), Local Area Banks, Risk management and finance teams handling NPA provisioning and capital adequacy
Can we still net floating provisions from gross NPAs?
Yes, RBI has deferred the earlier rule that would have disallowed this. You can continue to choose between netting from gross NPAs or including in Tier II capital, subject to the 1.25% of RWA cap.
Why did RBI defer this change?
Global bodies like FSB, BCBS, and CGFS are still working on counter-cyclical provisioning norms. RBI decided to wait for those outcomes before modifying existing provisioning rules.
What is the 1.25% ceiling for Tier II capital?
If you choose to include floating provisions in Tier II capital, the total amount cannot exceed 1.25% of your bank's total risk-weighted assets.