Asset Classification and Provisioning under COVID19 Regulatory Package

On Friday (April 17), the Reserve Bank of India announced freezing of classification of non-performing assets for three months starting March 1, in view of the widespread impact of the Covid-19 pandemic and the subsequent nationwide lockdown.

 “In respect of all accounts for which lending institutions decide to grant moratorium and which were standard as on March 1, 2020, the 90-day NPA norm shall exclude the moratorium period, i.e., there would be an asset classification standstill for all such accounts from March 1, 2020 to May 31, 2020,” the Governor’s statement said.

The above decision was taken by the Central Bank in response to a demand made by the Indian Banks’ Association that NPA norm should exclude the moratorium period. However, in view of the risk build-up in bank balance sheets due to stress and delays in recoveries, the regulator also said banks need to make a higher provision of 10% on all accounts where asset classification benefit is extended. The provision will be spread across the March and June quarters to be phased over as under:

(i) Quarter ended March 31, 2020 – not less than 5 per cent

(ii) Quarter ending June 30, 2020 – not less than 5 per cent

These provisions shall not be reckoned for arriving at net NPAs till they are adjusted against the actual provisioning requirements and they can be later adjusted against the provisioning requirements for actual slippages, it said. Further, till such adjustments, these provisions shall not be netted from gross advances but shown separately in the balance sheet as appropriate. As per the communication, Banks will have to give additional disclosures to demonstrate how much distressed and non-distressed accounts have been subjected to this asset classification. The residual provisions at the end of the financial year can be written back or adjusted against the provisions required for all other accounts, it said.

Normally, if accounts would have turned NPA, 15% provisioning is applicable for sub-standard. Since the regulator has directed 10% provisions, the new provisioning requirement will impact banks profitability in 2019-20 and 2020-21 as provision coverage ratio for all banks going up.