What changed
RBI introduced a mandatory general provision of 0.25% on outstanding standard assets for all NBFCs, effective January 17, 2011. This provision cannot be used to reduce net NPAs and must be disclosed separately in the balance sheet. Additionally, these provisions can be included in Tier II capital, but only up to 1.25% of total risk-weighted assets.
What it means for you
NBFCs must now build a financial buffer against potential future losses even on performing loans, enhancing resilience during economic downturns. This increases provisioning costs slightly but strengthens capital adequacy. Lenders need to adjust their balance sheet presentation and capital planning to accommodate this new requirement.
What you must do
- Calculate and set aside 0.25% provision on all outstanding standard assets immediately.
- Show this provision as 'Contingent Provisions against Standard Assets' in the balance sheet, separate from gross advances.
- Ensure these provisions are not netted from gross advances or used to arrive at net NPAs.
- Include general provisions on standard assets in Tier II capital, but cap total general provisions/loss reserves at 1.25% of risk-weighted assets.
Who it affects
All NBFCs (deposit accepting and non-deposit accepting), NBFC compliance and finance teams, RBI's Department of Non-Banking Supervision
What is the provisioning rate for standard assets under this circular?
NBFCs must make a general provision of 0.25% on the outstanding amount of all standard assets.
Can this standard asset provision be used to reduce net NPAs?
No, the circular explicitly states that provisions on standard assets should not be reckoned for arriving at net NPAs.
How should NBFCs treat these provisions in their balance sheet?
The provisions need not be netted from gross advances but must be shown separately as 'Contingent Provisions against Standard Assets'.