In order to help banks on improving their financial position, the banking regulator RBI has issued fresh norms for the provisioning of non-performing assets (NPAs). RBI is encouraging banks to increase the minimum provisioning requirement from the existing level.

On Wednesday RBI issued a notice to banks that stated, "Banks may voluntarily make specific provisions for NPAs at rates which are higher than the rates prescribed under existing regulations."

Ernst & Young director Viren Mehta said, "Banks can now head and make additional provisions without the risk of not being able of write back of that provision, when the NPAs turn performing assets."

Meanwhile the notice also said that the additional provisions such as minimum regulatory provision on NPAs, may be netted off from gross NPAs to arrive at the net NPAs.

"It also provided clarity for restructured NPLs, where the provisions for NPAs need to be made over and above the provision for diminution in fair value of restructured NPAs," added Mr Mehta.

As per the revised norms, banks can use the provisions made for decline in the fair value of restructured advances, which includes both standard assets and NPAs, for netting from relative assets. The amount used for provisioning could be reduced from the outstanding advance.

The central bank also said that, when the proceeds from the sale of standard assets are higher than book value, a bank can credit the excess amount to profit and loss account.

Besides, the excess provisions that arise on NPA sale can be admitted as Tier-II capital. However there will be an overall ceiling of 1.25% of total risk weighted assets on these provisions. Therefore these excess provisions on the sale of NPAs would be eligible for Tier-II status.

Further RBI clarified that even the floating provisions that cannot be netted from gross NPAs to arrive at net NPAs, will also be considered as a part of Tier-II capital subject to the overall ceiling of 1.25% of total risk weighted assets.

These revised policies of higher rates of provisioning is expected to be approved by the bank boards and thereby adopted consistently every year.