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RBI/2005-06/421
DBOD.NO.BP. BC. 89 / 21.04.048/ 2005-06
June 22, 2006
All Scheduled Commercial Banks
(Excluding RRBs)
Dear Sir,
Prudential norms on creation and utilisation
of floating provisions
In terms of Para (3) of circular DBOD.No.BC.8/21.04.043/94
dated February 4, 1994 on 'Income Recognition, Provisioning and Other Related
Matters', banks have been permitted to set-off the floating provisions, wherever
available, against provisions required to be made as per extant prudential guidelines
on provisioning. Further, in terms of Para 5.6 of our Master Circular DBOD No.BP.BC.11/21.04.048/2005-06
dated July 1, 2005 on ‘Prudential norms on Income recognition, Asset Classification
and Provisioning pertaining to Advances’ banks have been advised to voluntarily
set apart provisions much above the minimum prescribed level as a desirable
practice due to the fact that higher loan loss provisioning adds to the overall
financial strength of the banks and the stability of the financial sector.
2. The use of floating provisions to set-off
against provisions required to be made as per extant prudential guidelines appear
to have been used in smoothening of profits in some cases. Hence, the extant
guidelines have been reviewed and it has been decided to issue revised instructions
on, utilisation, creation, accounting and disclosures of floating provisions,
i.e., provisions which are not made in respect of specific non-performing assets
or are made in excess of regulatory requirement for provisions for standard
assets.
(i) Principle for utilisation of floating provisions
by banks
The floating provisions should not be used for
making specific provisions as per the extant prudential guidelines in respect
of non-performing assets or for making regulatory provisions for standard assets.
The floating provisions can be used only for contingencies under extraordinary
circumstances for making specific provisions in impaired accounts after obtaining
board’s approval and with prior permission of RBI. The boards of the banks should
lay down an approved policy as to what circumstances would be considered extraordinary.
(ii) Principle for creation of floating provisions
by banks
The bank's board of directors should lay down
approved policy regarding the level to which the floating provisions can be
created. The bank should hold floating provisions for ‘advances’ and ‘investments’
separately and the guidelines prescribed will be applicable to floating provisions
held for both ‘advances’ & ‘investment’ portfolios.
(iii) Accounting
Floating provisions cannot be reversed by credit
to the profit and loss account. They can only be utilised for making specific
provisions in extra-ordinary circumstances as mentioned above. Until such utilisation,
these provisions can be netted off from gross NPAs to arrive at disclosure of
net NPAs. Alternatively, they can be treated as part of Tier II capital within
the over-all ceiling of 1.25 % of total risk-weighted assets.
(iv) Disclosures
Banks should make comprehensive disclosures
on floating provisions in the "notes on accounts" to the balance sheet
on (a) opening balance in the floating provisions account, (b) the quantum of
floating provisions made in the accounting year, (c) purpose and amount of draw
down made during the accounting year, and (d) closing balance in the floating
provisions account.
(v) Provisions for advances at higher than prescribed
rates
A bank may voluntarily make specific provisions
for advances at rates which are higher than the rates prescribed under existing
regulations provided such higher rates are approved by the Board of Directors
and consistently adopted from year to year. Such additional provisions are not
to be considered as floating provisions.
3. Please acknowledge receipt.
Yours faithfully,
(Prashant Saran)
Chief General Manager-in-Charge
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