The provisions set aside for non-performing assets (NPAs) above the regulatory norms would be treated as capital for banks. This would facilitate more provisioning for NPAs. Banks have been wary of making extra provisions for NPAs. At present they are not treated as capital and cannot be credited to the profit and loss account.
In a circular issued to banks on Wednesday, 26 March 2009, the RBI said that banks may voluntarily make specific provisions for NPAs at rates which are higher than the rates prescribed under existing regulations. Higher rates of provisioning should be approved by bank boards and the policy be adopted consistently every year.
The circular also clarified that the additional provisions for NPAs, as happens in the case of regulatory provisions, may be netted off from gross NPAs to arrive at the net NPAs.
If the bank has sold a standard asset and the sale consideration is higher than the book value of the asset, then the excess provisions that end up arising in the process may be credited to profit and loss account.
Furthermore, excess provisions, which arise on sale of NPAs, can be admitted as tier-II capital. But these provisions will be subject to the overall ceiling of 1.25% of total risk weighted assets. Though floating provisions cannot be netted from gross NPAs to arrive at net NPAs, it is clarified that they could be reckoned as part of tier-II capital subject to the overall ceiling of 1.25% of total risk weighted assets.
Provisions for diminution of fair value of restructured advances, both in respect of standard assets as well as NPAs, made on account of reduction in rate of interest and/or reschedulement of principal amount are permitted to be netted from the relative asset.
source: Capital Market