RBI/2004/261
DBOD.No.BP.BC. 99 /21.04.048/ 2003-2004

June 21, 2004

All Scheduled Commercial Banks
(Excluding RRBs)

Dear Sir,

Annual Policy Statement for the year 2004-05 : Additional Provisioning Requirement for NPAs

At present, banks are required to make provisions on NPAs on a graded scale based on the age of the NPA. However, in respect of NPAs included in 'doubtful for more than three years' category, the provisioning requirement on the secured portion remains unchanged at 50 per cent, irrespective of its age, till it is identified as a loss asset. With the enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the chances / extent of recovery of an asset reducing over a period of time, it is essential that banks expedite recovery of NPAs.

2. In this connection, please refer to paragraph 122 of the annual policy Statement for the year 2004-2005 enclosed to the Governor's letter No.MPD.BC.249/07.01.279/2003-2004 dated May 18, 2004 (copy of the paragraph enclosed). Accordingly, it has been decided to introduce graded higher provisioning according to the age of NPAs in 'doubtful for more than three years' category, with effect from March 31, 2005. Consequently, the increase in provisioning requirement on the secured portion would be applied in a phased manner over a three year period in respect of the existing stock of NPAs classified as 'doubtful more than three years' as on March 31, 2004.

However, in respect of all advances classified as 'doubtful more than three years' on or after April 1, 2004, the provisioning requirement would be 100 per cent. Accordingly, the provisioning norm for advances identified as 'doubtful for more than three years' will be as under with effect from March 31, 2005 :

Portion of the advance, which is not covered by the realisable value of tangible security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis, provision will be to the extent of 100 per cent as hitherto.

A few illustrations are furnished in Annex for clarity in this regard.

4. Banks are advised to make suitable provisions during the current year to ensure a smooth transition to the revised norm which becomes effective from March 31, 2005.

Yours faithfully,

Chief General Manager-in-Charge

122. At present, banks are required to make provisions on NPAs on a graded scale based on the age of the NPA. However, in respect of ‘doubtful assets for more than three years’, the provisioning requirement on the secured portion remains unchanged at 50 per cent, till it is identified as a loss asset. With the enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the chances/extent of recovery of an asset reducing over a period of time, it is essential that banks expedite recovery of NPAs. Accordingly, it is proposed:

• To introduce graded higher provisioning requirement according to the age of NPAs, which are included under ‘doubtful for more than three years’ category, with effect from March 31, 2005. "

Illustrations :

I. Existing stock of advances classified as doubtful more than 3 years' as on 31 March 2004

The outstanding amount as on 31 March 2004 : Rs 25,000
Realisable value of security : Rs 20,000
Period for which the advance has remained in 'doubtful' category as on 31 March 2004 : 4 years ( i.e Doubtful > 3 years)

Provisioning requirement :

II . Advances classified as 'doubtful more than three years' on or after 1 April 2004

The outstanding amount as on 31 March 2004 : Rs 10,000
Realisable value of security : Rs 8,000
Period for which the advance has remained in 'doubtful' category as on 31 March 2004 : 2.5 years

Provisioning requirement: