KOLKATA: Reserve Bank of India has made life a little bit easier for banks by tweaking the bad loan divergence rule. Banks’ disclosure of divergence practice mandated by RBI aims at improving transparency in asset classification and preventing under-reporting of bad loans.

The central bank has on Monday appears to have diluted the rule a bit without compromising the intent 

“Some banks, on account of low or negative net profit, are required to disclose small divergences which is contrary to the regulatory intent that only material divergences should be disclosed,” RBI said. 

It told banks to disclose divergence when the additional provisioning for NPAs assessed by RBI exceeds 10% of the reported profit before provisions and contingencies for the reference period, instead of the earlier rule of 15% of the published net profits after tax. 

There was no change in the second condition: the additional gross NPAs identified by RBI exceed 15% of the published incremental gross NPAs for the reference period. 

“This is clearly in line with substance over form. Some of the state-run banks were needed to report even minor non material differences primarily because they were making losses or hardly making profit on account of large provisioning pressure. This could have led to conflicting signals to the market. The current notification would obviate the need for the same,” said Prakash Agarwal, director financial institutions at India Ratings. 

Earlier, the public financial statements with material divergences in banks’ asset classification and provisioning from RBI rule did not depict the true and fair view of the financial position of the bank. For the last couple of years, the central bank used to assess compliance by banks with extant prudential norms on income recognition, asset classification and provisioning as part of its supervisory processes. 

Published On : 02-04-2019

Source : The Economic Times