Provisioning Coverage Ratio
i. Provisioning Coverage Ratio (PCR) is essentially the ratio of provisioning to gross non-performing assets and indicates the extent of funds a bank has kept aside to cover loan losses.
ii. From a macro-prudential perspective, RBI had required that the banks should build up provisioning and capital buffers in good times i.e. when the profits are good, which can be used for absorbing losses in a downturn. This was aimed at enhancing the soundness of individual banks, as also the stability of the financial sector. It was, therefore, decided that banks should augment their provisioning cushions consisting of specific provisions against NPAs as well as floating provisions, and ensure that their total provisioning coverage ratio, including floating provisions, is not less than 70 per cent.
Accordingly, banks were advised to achieve this norm not later than endSeptember 2010.
RBI has further advised the banks that:
a. the PCR of 70 percent may be with reference to the gross NPA position in banks as on September 30, 2010;
b. the surplus of the provision under PCR vis-a-vis as required as per prudential norms should be segregated into an account styled as “countercyclical provisioning buffer”, computation of which may be undertaken as per the format given in Annex – 3 to the RBI’s Master Circular on “Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances” dated July 1, 2015; and
c. this buffer will be allowed to be used by banks for making specific provisions for NPAs during periods of system wide downturn, with the prior approval of RBI. As a countercyclical measure, vide RBI circular No. DBOD.No.BP. 95/21.04.048/2013-14 on “Utilisation of Floating Provisions/Counter Cyclical Provisioning Buffer” dated February 7, 2014 banks were permitted to utilise upto 33 per cent of countercyclical provisioning buffer / floating provisions held by them as on March 31, 2013, for making specific provisions for nonperforming assets, as per the policy approved by their Board of Directors
d. banks are required to build up ‘Dynamic Provisioning Account’ during good times and utilize the same during downturn. Under the proposed framework, banks are expected to either compute parameters such as probability of default, loss given default, etc. for different asset classes to arrive at long term average annual expected loss or use the standardized parameters prescribed by RBI towards computation of Dynamic Provisioning requirement. Dynamic loan loss provisioning framework is expected to be in place with improvement in the system. Meanwhile, banks should develop necessary capabilities to compute their long term average annual expected loss for different asset classes, for switching over to the dynamic provisioning framework.
iii. The PCR of the bank should be disclosed in the Notes to Accounts to the Balance Sheet.