Provisioning For Country Risk :
Banks are required to make provisions, with effect from the year ending 31 March 2003, on the net funded country exposures on a graded scale ranging from 0.25 to 100 percent according to the risk categories mentioned below. To begin with, banks are required to make provisions as per the following schedule:
Risk Category |
ECGC Classification |
Provisioning
|
| Insignificant |
A1 |
0.25 |
| Low |
A2 |
0.25 |
| Moderate |
B1 |
5 |
| High |
B2 |
20 |
| Very high |
C1 |
25 |
| Restricted |
C2 |
100 |
| Off-credit |
D |
100 |
Banks are required to make provision for country risk in respect of a country where its net funded exposure is one per cent or more of its total assets. The provision for country risk shall be in addition to the provisions required to be held according to the asset classification status of the asset. In the case of ‘loss assets’ and ‘doubtful assets’, provision held, including provision held for country risk, may not exceed 100% of the outstanding. Banks may not make any provision for ‘home country’ exposures i.e. exposure to India. The exposures of foreign branches of Indian banks to the host country should be included. Foreign banks shall compute the country exposures of their Indian branches and shall hold appropriate provisions in their Indian books. However, their exposures to India will be excluded. Banks may make a lower level of provisioning (say 25% of the requirement) in respect of short-term exposures (i.e., exposures with contractual maturity of less than 180 days).
Provisioning norms for sale of financial assets to Securitisation Company (SC) / Reconstruction company (RC) –
(i) When a bank / FI sells its financial assets to SC/ RC, on transfer the same will be removed from its books.
(ii) If the sale of financial assets to SC/RC, is at a price below the net book value (NBV) (i.e., book value less provisions held), the shortfall should be debited to the profit and loss account of that year. Banks can also use countercyclical / floating provisions for meeting any shortfall on sale of NPAs i.e., when the sale is at a price below the net book value (NBV).
However, for assets sold on or after February 26, 2014 and upto March 31, 2015, as an incentive for early sale of NPAs, banks can spread over any shortfall, if the sale value is lower than the NBV, over a period of two years. This facility of spreading over the shortfall will be subject to necessary disclosures in the Notes to Account in Annual Financial Statements of the banks. The RBI vide Notification dated May 21, 2015 had decided to extend this dispensation for assets sold on or after March 31, 2015 and up to March 31, 2016 Further RBI has vide notification DBR.No.BP.BC.102/21.04.048/2015-16 dated June 13, 2016 has decided to extend the dispensation of amortising the shortfall up to March 31, 2017. However for the assets sold from the period April 1, 2016 to March 31, 2017, banks will be allowed to amortise the shortfall over a period of only four quarter from the quarter in which the sale took place.
Further, where a bank chooses to make the necessary provisions over more than one quarter and this results in the full provisioning remaining to be made as on the close of a financial year, banks should debit ‘other reserves’ [i.e., reserves other than the one created in terms of Section 17(2) of the Banking Regulation Act 1949] by the amount remaining un-provided at the end of the financial year, by credit to specific provisions. However, banks should proportionately reverse the debits to ‘other reserves’ and
complete the provisioning by debiting profit and loss account, in the subsequent quarters of the next financial year.
Banks shall make suitable disclosures in Notes to Accounts with regard to the quantum of provision made during the year to meet the shortfall in sale of NPAs to SCs/RCs and the quantum of unamortised provision debited to ‘other reserves’ as at the end of the year.
(iii) For assets sold on or after February 26, 2014, banks can reverse the excess provision on sale of NPAs, if the sale value is for a value higher than the NBV, to its profit and loss account in the year the amounts are received. However, banks can reverse excess provision arising out of sale of NPAs only when the cash received (by way of initial consideration and / or redemption of SRs / PTCs) is higher than the net book value (NBV) of the asset. Further, reversal of excess provision will be limited to the extent to which cash received exceeds the NBV of the asset. With regard to assets sold before February 26, 2014, excess provision, on account of sale value being higher than NBV, should not be reversed but should be utilized to meet the shortfall/ loss on account of sale of other financial assets to SC/RC.
(iv) When banks/ FIs invest in the security receipts/ pass-through certificates issued by SC/RC in respect of the financial assets sold by them to the SC/RC, the sale shall be recognised in books of the banks / FIs at the lower of:
the redemption value of the security receipts/ pass-through certificates, and
the NBV of the financial asset.
The above investment should be carried in the books of the bank / FI at the price as determined above until its sale or realization, and on such sale or realization, the loss or gain must be dealt with in the same manner as at (ii) and (iii) above.
All instruments received by banks/FIs from SC/RC as sale consideration for financial assets sold to them and also other instruments issued by SC/ RC in which banks/ FIs invest will be in the nature of non SLR securities. Accordingly, the valuation, classification and other norms applicable to investment in non-SLR instruments prescribed by RBI from time to time would be applicable to bank’s/ FI’s investment in debentures/ bonds/ security receipts/PTCs issued by SC/ RC. However, if any of the above instruments
issued by SC/RC is limited to the actual realisation of the financial assets assigned to the instruments in the concerned scheme the bank/ FI shall reckon the Net Asset Value (NAV), obtained from SC/RC from time to time, for valuation of such investments.
Banks’/ FIs’ investments in debentures/ bonds/ security receipts/PTCs issued by a SC/RC will constitute exposure on the SC/RC. As only a few SC/RC are being set up now, banks’/ FIs’ exposure on SC/RC through their investments in debentures/ bonds/security receipts/PTCs issued by the SC/ RC may go beyond their prudential exposure ceiling.
In view of the extra ordinary nature of event, banks/ FIs will be allowed, in the initial years, to exceed prudential exposure ceiling on a case-to-case basis.
Banks/ FIs, which sell their financial assets to an SC/ RC, shall be required to make the disclosures in the Notes on Accounts to their Balance sheets. For guidelines on the presentation of the disclosures, refer para 6.6 of the master circular BR.No.BP.BC.2/21.04.048/2015-16 – Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining toAdvances.
Prudential Guidelines on provisioning in case of Revitalising Stressed Assets in the Economy. Pursuant to the RBI notification DBR.BP.BC.No.82/ 21.04.132 / 2015-16 dated
February 25, 2016 on Review of Prudential Guidelines- Revitalising Stressed Assets in the Economy, the classification of the advances and provisioning thereon will be as follows:
| Category A–
In case the lender agreed to Corrective Action Plan (CAP) in the Joint Leander Forum (JLF) meeting and also conveyed final approval to the CAP within the stipulated period. Asset classification– As per the extant asset classification norms Provisioning– As per the extant provisioning norms. |
|
|
Category-B
In case the lender agreed to CAP as approved in the JLF meeting but conveyed final approval and signed off the detailed final CAP after the stipulated period but within the prescribed implementation period.
Asset classification: Lowest asset classification of the borrower among all the JLF lenders.
Provisioning- A penal provisioning of 10 per cent in addition to provisioning applicable as per Lowest asset classification of the borrower with any JLF lender, for one year from the date of sign off of CAP.
Category-C
In case the lender agreed to CAP, as approved, in the JLF meeting but failed to convey final approval and sign off the detailed final CAP within prescribed implementation period.
Asset classification: Lowest asset classification of the borrower among all the JLF lenders.
Provisioning: A penal provisioning of 15 per cent in addition to provisioning applicable as per Lowest asset classification of the borrower with any JLF
lender, for one year from the date of sign off of CAP.
As the prescribed implementation period is over, the lender has to compulsorily abide by the terms of the approved CAP.
RBI vide their circular dated 1 September 2016 has issued guidelines on Sale of Stressed Assets by Banks. In terms of these guidelines, the Board of the bank need to lay down detailed policies and guidelines on sale of stressed assets to SC/ RC which should, inter alia, cover the following aspects:
i. Financial assets to be sold.
ii. Norms and procedure for sale for such financial assets.
iii. Valuation procedure to be followed to ensure that the realisable value of financial assets is reasonably estimated.
iv. Delegation of powers of various functionaries for taking decision on the sale of the financial assets; etc.
Auditors need to ensure that the Bank comply with the RBI Guidelines issued on 1 September vide circular number RBI/2016-17/56 DBR.No.BP.BC.9/ 21.04.048/2016-17. In addition to the existing disclosure, Banks need to comply with the disclosure requirement in this circular.
Disclosure Requirements
A. Details of financial assets sold to SC/RC: (Amounts in Rupees crore)
1. No. of accounts sold
2. Aggregate outstanding (net of provisions)
3. Aggregate consideration received
4. Additional consideration realized in respect of accounts transferred in earlier years
5. Aggregate gain / loss over net book value
B. Details of Book Value of investments in Security receipts (Amounts in Rupees crore)
1. Book Value of investments in Security receipts – Backed by NPA’s sold by bank as underlying
2. Book Value of investments in Security receipts – Backed by NPA’s sold by other banks / financial institutions/ non – banking financial companies as underlying
3. Totals of above