RBI New Rules for ‘Loan Loss Provision’ by Banks
The Reserve Bank of India (RBI) has issued new rules for banks’ loan loss provisioning, aimed at aligning them with the expected credit loss (ECL) approach. The new norms will be applicable to all banks, including small finance banks and foreign banks operating in India.
The central bank has instructed all banks to prepare a policy for making provisions for standard assets at least once a year. As per the new guidelines, banks need to make an additional provision of 10% for new loans with an ECL of more than 15% but less than 50% and an additional 20% for new loans with an ECL of 50% or more. Banks will have to make a 100% provision on loans with an ECL of 100% or more.
The RBI has also made it mandatory for banks to disclose their provisions for standard assets in their notes to accounts. Banks will need to disclose the percentage of standard assets on which they have made provisions during the reporting period. The new rules will help improve transparency and bring uniformity to the provisioning practices of banks.
Why this News is important:
New rules for loan loss provisioning by banks have been issued by the Reserve Bank of India (RBI). These new rules will be applicable to all banks, including small finance banks and foreign banks operating in India. The central bank has instructed all banks to prepare a policy for making provisions for standard assets at least once a year. The new guidelines require banks to make an additional provision of 10% for new loans with an ECL of more than 15% but less than 50% and an additional 20% for new loans with an ECL of 50% or more. Banks will have to make a 100% provision on loans with an ECL of 100% or more. The new rules will help improve transparency and bring uniformity to the provisioning practices of banks.
Historical context:
The RBI has been taking steps to improve the financial health of banks and bring about transparency in their operations. In 2018, the central bank introduced the ECL approach for banks to calculate their loan loss provisions. The ECL approach takes into account expected credit losses over the life of the asset and not just the losses incurred till the reporting date. This approach helps banks to identify potential losses at an early stage and make adequate provisions to cover them. The new rules for loan loss provisioning by banks are in line with the ECL approach.
Key Takeaways from “RBI Issues New Rules for Loan Loss Provision by Banks”:
| S.No. | Key Takeaways |
|---|---|
| 1. | RBI has issued new rules for banks’ loan loss provisioning, aimed at aligning them with the expected credit loss (ECL) approach. |
| 2. | The new norms will be applicable to all banks, including small finance banks and foreign banks operating in India. |
| 3. | Banks need to make an additional provision of 10% for new loans with an ECL of more than 15% but less than 50%, and an additional 20% for new loans with an ECL of 50% or more. |
| 4. | Banks will have to make a 100% provision on loans with an ECL of 100% or more. |
| 5. | The new rules will help improve transparency and bring uniformity to the provisioning practices of banks. |
Conclusion
In conclusion, the RBI has issued new rules for loan loss provisioning by banks to align them with the expected credit loss approach. The new guidelines require banks to make an additional provision of 10% for new loans with an ECL of more than 15% but less than 50% and an additional 20% for new loans with an ECL of 50% or more.
Important FAQs for Students from this News
Q: What are the new rules for loan loss provisions by banks announced by RBI?
A: RBI has announced new rules for banks to calculate the provision for loan losses. The new rules replace the earlier system of ‘incurred loss’ with a new system called the ‘expected credit loss’ (ECL) method.
Q: What is the difference between the ‘incurred loss’ method and the ‘expected credit loss’ method?
A: The ‘incurred loss’ method requires banks to make provisions for losses only after they occur. Whereas, the ‘expected credit loss’ method requires banks to make provisions based on expected future losses, taking into account various risk factors.
Q: Why has RBI introduced the ‘expected credit loss’ method?
A: The ‘expected credit loss’ method is considered a more forward-looking approach and is expected to improve the accuracy of loan loss provisions. It will also bring Indian banks in line with global accounting standards.
Q: How will the new rules affect banks?
A: The new rules are expected to increase the provisions that banks need to make for loan losses. This could impact the profitability of banks, especially those with high levels of non-performing assets (NPAs).
Q: When will the new rules come into effect?
A: The new rules will come into effect from April 1, 2018.
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