Banks asked to raise provisioning for NPA selloffs

The Reserve Bank of India has asked banks to build up provisions, significantly above the minimum regulatory requirements, for their non-performing assets particularly for those assets which they propose to sell to securitisation/reconstruction companies.

"The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, allows securitisation/reconstruction companies created under the Act, to purchase non-performing assets from banks. In order to facilitate sale of NPAs to securitisation/reconstruction companies, guidelines to banks and FIs have been issued covering:

• Policy for sale of assets to securitisation/reconstruction companies approved by the board;
• Accounting treatment of sale of NPAs and investment in bonds, debentures, security receipts that may be offered by the securitisation/reconstruction companies and valuation thereof;
• Capital adequacy requirements and exposure norms applicable to the above investments; and
• Disclosure requirements.

"It is envisaged that banks would be able to sell their NPAs to securitisation/reconstruction companies only at considerable discount. The resultant shortfall, if any, in the net book value after deducting provisions held would be required to be debited to the profit and loss account."

"Banks are, therefore, advised to build up provisions, significantly above the minimum regulatory requirements, for their NPAs particularly for those assets which they propose to sell to securitisation/reconstruction companies," the statement said.