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RBI cracks the whip on errant banks

  • What: The Reserve Bank of India (RBI) has asked several lenders to make a Provisioning of 25% of their outstanding loan for their exposure in JP Associate for the January-March quarter of 2016-17.
  • Total bank loan to the group, which decided to sell its cement business to Aditya Birla group last year, is a whopping ₹58,000 crore.
  • Stressed loans were flagged by the banking regulator in its Asset Quality Review of December 2015 and banks were asked to make provisions.
  • The account was mentioned in the third list of Asset Quality Review (AQR), so banks were asked to provide 2.5% in each quarter of 2016-17.
  • However, since the group sold two of its hydro power plants to JSW Energy, some bankers argued this amounts to Strategic Debt Restructuring (SDR) as ownership changed, hence avoided provisioning.
  • While some smaller banks started making provisions, most lenders avoided it.

Note4Students: Although the news itself is not that important. But terms highlighted can be used for Prelims. Measures taken by RBI to resolve NPA problem are important for both Prelims and Mains. Arguments of Banks for not adhering to RBI guidelines and negligence on part of big lenders can be quoted in Mains answers.

Back2Basics: Provisioning

  • In financial accounting, a provision is an account which records a present liability of an entity.
  • General provisions are balance sheet items representing funds set aside by a company as assets to pay for anticipated future losses.
  • For banks, a general provision is considered to be supplementary capital under the first Basel Accord.
  • A loan loss provision is an expense that is reserved for defaulted loans or credits.
  • It is an amount set aside in the event that the loan defaults.
  • The Provision Coverage Ratio (PCR), a measure of the funds set aside by banks to cover bad loans, has declined steeply in the past three years for almost all public sector banks.
  • A higher provision coverage ratio means the bank is protecting itself better against its bad loans.
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