Provisioning Norms for NPA
Relevent for JAIIB PPB | CAIIB ABM | CCP Module E
Why It Matters in Branch:
Provisioning directly impacts a bank’s profit and loss account. Every quarter, provisioning decisions determine whether a bank reports profit or loss. Understanding this is essential for any officer moving into credit or treasury roles.
SHORT NOTES
PROVISIONING — CONCEPT:
When a loan becomes NPA, the bank sets aside a percentage of the outstanding as ‘provision’ — a charge to the P&L — acknowledging that full recovery is uncertain. This reduces the bank’s reported profit but reflects true financial position.
ASSET-WISE PROVISIONING REQUIREMENTS:
PROVISIONING NORMS FOR STANDARD ASSETS (Performing):
- Direct Agriculture, SME: 0.25%
- Commercial Real Estate — Residential Housing: 0.75%
- Commercial Real Estate — Others: 1.00%
- All other loans: 0.40%
Standard asset provision is held in Countercyclical Provisioning Buffer (not deducted from advance)
PROVISIONING NORMS FOR SUB-STANDARD ASSETS (NPA up to 12 months):
- Secured Portion: 15%
- Unsecured Portion: 25%
- If Infrastructure loan with no security: 20%
PROVISIONING NORMS FOR DOUBTFUL ASSETS:
D1 (12-36 months NPA): Secured: 25%, Unsecured: 100%
D2 (36-48 months NPA): Secured: 40%, Unsecured: 100%
D3 (above 48 months NPA): Secured: 100%, Unsecured: 100%
LOSS ASSETS:
- 100% of outstanding — full provisioning required
- Should be written off from books
PROVISION COVERAGE RATIO (PCR):
PCR = (Provisions held) / (Gross NPA) × 100
RBI guideline: Minimum 70% PCR
IMPACT ON PROFITABILITY:
P&L Dr. Provision for NPA → Balance Sheet: Reduces Net Advances
Higher NPA = Higher Provisioning = Lower Profit/Loss
WRITE-OFF:
Write-off does not extinguish the debt — bank can still pursue legal recovery.
Written-off amounts may result in recovery income if received later (shown as “Recoveries from Written-off Accounts”).
FLOATING PROVISIONS:
Banks can create additional ‘floating provisions’ in good years — used in bad years without P&L impact.
BRANCH CONTEXT
✦An account moving from Sub-Standard (15% provision) to Doubtful 1 (25% provision) on a Rs.1 crore loan means an additional Rs.10 lakh provision — straight hit to branch P&L. This is why early resolution of stressed accounts matters.