Acknowledging that mounting bad loans are a systemic concern for the banking sector in the country, Reserve Bank of India (RBI) has allowed banks to utilize up to one-third of the countercyclical provisioning buffer held by them during last fiscal for making specific provisions to cover spiraling bad loans.
Countercyclical provisioning buffers and floating provisions basically refer to the capital reserves that banks need to build in good times and that are to be used only in times of economic or system-wide downturns.
Notably, this is for the first time that India’s central bank has allowed banks to utilize emergency provisions ever since the reserves were created starting 2010. Otherwise, such countercyclical provisions can be utilized by banks under extraordinary circumstances for making specific provisions against impaired accounts that too after obtaining the board’s approval and RBI’s permission.