Banks can now divert as provision against bad loans a bigger share of the capital cushion required to be set aside to guard themselves against an economic downturn, the Reserve Bank of India said, easing pressure on a struggling sector.
The central bank now mandates that banks set aside funds for emergency use in a so-called counter cyclical capital buffer.
Up to half that buffer, held as of December 31, can now be used for provision against bad loans, up from 33 per cent allowed formerly, the RBI said.
The RBI move would allow banks to lower provisioning against bad loans, helping their profitability, said Manish Ostwal.
The RBI has been keen to spur the sector to lend more and fuel economic growth, but only a handful of banks have cut lending rates despite two cuts in interest rates, due to weak demand for credit and the high cost of funds.
Banks also continue to struggle with non-performing loans.
The gross bad loans ratio at banks has doubled in the past two years amid an economic downturn.
Banks’ gross bad loans ratio could rise to as much as 5.7 per cent by March, 2016, from 4.5 per cent last December, rating agency ICRA estimates.