Lenders get Flexibility to Cover Bad Loans

  • 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.