What changed
RBI issued clarifications on three aspects of provisioning for urban cooperative banks. First, any extra specific provisions made for NPAs above the prescribed rates can be deducted from gross NPAs to report net NPAs, but these extra provisions cannot be treated as Tier II capital. Second, when an NPA is sold and the sale proceeds exceed the book value net of provisions, the excess provision must remain as a provision and can be counted as Tier II capital, subject to the 1.25% ceiling. Third, provisions for diminution in fair value of restructured advances, whether standard or NPA, can be netted from the relative loan asset.
What it means for you
For urban cooperative banks, this circular provides clarity on how to treat different types of provisions for capital adequacy and reporting purposes. Banks can now confidently deduct additional NPA provisions from gross NPAs without worrying about capital treatment, but must remember these don't boost Tier II capital. The treatment of excess provisions from NPA sales ensures they remain a buffer and can contribute to capital within limits. The ability to net fair value diminution provisions from restructured assets helps in presenting a cleaner balance sheet for such loans.
What you must do
- Review your NPA provisioning to ensure any additional specific provisions are correctly deducted from gross NPAs and not included in Tier II capital.
- For any NPA sales, ensure excess provisions are retained as provisions and only counted as Tier II capital up to the 1.25% risk-weighted assets ceiling.
- For restructured advances, verify that provisions for diminution in fair value are netted from the respective loan asset in your books.
- Update your internal reporting and capital adequacy calculations to align with these clarifications.
Who it affects
All Primary (Urban) Cooperative Banks, Risk management and finance teams at UCBs, Auditors and compliance officers handling NPA provisioning and capital adequacy
Can we count additional NPA provisions as Tier II capital?
No, additional specific provisions made for NPAs beyond the prescribed rates cannot be reckoned as Tier II capital, though they can be deducted from gross NPAs to arrive at net NPAs.
What happens to excess provisions when we sell an NPA at a gain?
If the sale proceeds exceed the book value net of provisions, the excess provision should not be written back to profit and loss. It must remain as a provision and can be considered as Tier II capital, subject to the overall ceiling of 1.25% of risk-weighted assets.
How should we treat provisions for fair value diminution on restructured advances?
Such additional provisions, made for economic loss due to interest rate reduction or reschedulement, can be netted from the relative loan asset, whether the advance is standard or NPA.