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In a bid to ensure that banks are better prepared to deal with potential stressed assets, the Reserve Bank of India has asked them to put in place a board-approved policy for making provisions for standard assets at rates higher than the regulatory minimum, based on evaluation of risk and stress in various sectors.
To make up for the provision at higher rates, banks are likely to up the lending rate for borrowers, whose asset classification is currently ‘standard’. A ‘standard’ asset is an one which is regular in paying interest/instalment to the bank.
More immediately, as the telecom sector is reporting stressed financial conditions, and interest-coverage ratio for the sector is less than one, the RBI said the boards of banks may review the telecom sector latest by June 30, 2017, and consider making provisions for standard assets in this sector at higher rates.
The central bank reasoned that banks need to make provision at higher rates for standard assets in the telecom sector so that necessary resilience is built in the balance sheets should the stress reflect on the quality of exposure to the sector at a future date.
Besides, banks should also subject the exposure to the sector to closer monitoring.
Currently, the provisioning for standard assets ranges from 0.25 per cent for farm credit to agricultural activities and small and micro enterprises to 1 per cent for advances to commercial real estate sector.
In the case of corporate loans, such provisioning is pegged at 0.40 per cent.
Quarterly reviewAccording to the RBI, the board-approved policy will require a review, at least on a quarterly basis, of the performance of various sectors of the economy to which the bank has exposure to evaluate the present and emerging risks and stress therein.
The review may include quantitative and qualitative aspects such as debt-equity ratio, interest-coverage ratio, profit margins, ratings upgrade to downgrade ratio, sectoral non-performing assets/stressed assets, industry performance and outlook, and legal/ regulatory issues faced by the sector.
The reviews may also include sector-specific parameters.
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