What changed
RBI introduced a mandatory minimum PCR of 70% for all scheduled commercial banks (excluding RRBs), replacing the earlier range of 10-100% provisioning for NPAs. Banks must now compute PCR as per a prescribed format and disclose it in balance sheet notes. The deadline for compliance is end-September 2010.
What it means for you
Banks must significantly increase provisioning buffers, especially those with low PCR, which could impact near-term profitability. This macro-prudential measure aims to build loss-absorbing cushions during good times, enhancing individual bank soundness and overall financial stability. Banks with high PCR may need to maintain or slightly adjust their coverage.
What you must do
- Calculate current PCR using the prescribed format, including specific provisions, floating provisions, DICGC/ECGC claims, and suspense account amounts.
- Identify shortfall to reach 70% PCR and plan provisioning increases over the next 9 months.
- Ensure floating provisions used for PCR are not counted as Tier II capital.
- Disclose PCR in Notes to Accounts to the Balance Sheet from FY2010-11 onwards.
- Monitor NPA aging and security valuation to optimize provisioning efficiency.
Who it affects
All scheduled commercial banks (excluding RRBs), Credit risk and finance teams, Board of Directors and senior management, Auditors and compliance officers
What is included in the numerator for PCR calculation?
PCR numerator includes specific provisions for NPAs (including diminution in fair value of restructured NPAs), floating provisions (not used as Tier II capital), DICGC/ECGC claims received and held pending adjustment, and part payments kept in suspense accounts.
Does this apply to all NPAs or only certain categories?
The PCR applies to gross NPAs across all categories—sub-standard, doubtful (all buckets), and loss assets—plus technical/prudential write-offs. The ratio is computed on total gross NPAs.
What happens if a bank fails to meet the 70% PCR by September 2010?
The circular does not specify penalties, but non-compliance would likely attract supervisory scrutiny, possible restrictions on dividend distribution, or higher capital requirements. Banks are expected to achieve the norm within the timeline.