Page 213 - DMGT303_BANKING_AND_INSURANCE

Banking and Insurance

Notes above certain cut off levels so that the bank and the statutory auditors take into account the
assessment of the RBI while making provisions for loan loss, etc.

 The primary responsibility for making adequate provisions for any diminution in the
value of loan assets, investment or other assets is that of the bank managements and the
statutory auditors. The assessment made by the inspecting officer of the RBI is furnished to
the bank to assist the bank management and the statutory auditors in taking a decision in
regard to making adequate and necessary provisions in terms of prudential guidelines.

 In conformity with the prudential norms, provisions should be made on the non-
performing assets on the basis of classification of assets into prescribed categories as
detailed in paragraphs 4 supra. Taking into account the time lag between an account
becoming doubtful of recovery, its recognition as such, the realization of the security and
the erosion over time in the value of security charged to the bank, the banks should make
provision against substandard assets, doubtful assets and loss assets as below:

Loss Assets

The entire asset should be written off. If the assets are permitted to remain in the books for any
reason, 100 percent of the outstanding should be provided for.

Doubtful Assets

 100 percent of the extent to which the advance is not covered by the realizable value of the
security to which the bank has a valid recourse and the realizable value is estimated on a
realistic basis.
 In regard to the secured portion, provision may be made on the following basis, at the
rates ranging from 20 percent to 50 percent of the secured portion depending upon the
period for which the asset has remained doubtful:

Floating Provisions

Some of the banks make a 'floating provision' over and above the specific provisions made in
respect of accounts identified as NPAs. The floating provisions, wherever available, could be
set-off against provisions required to be made as per above stated provisioning guidelines.
Considering that higher loan loss provisioning adds to the overall financial strength of the
banks and the stability of the financial sector, banks are urged to voluntarily set apart provisions
much above the minimum prudential levels as a desirable practice.

Provisions on Leased Assets

Leases are peculiar transactions where the assets are not recorded in the Leases are peculiar
transactions where the assets are not recorded in the books of the user of such assets as Assets,
whereas they are recorded in books of the user of such assets as Assets, whereas they are
recorded in the books of the owner even though the physical existence of the asset is the books
of the owner even though the physical existence of the asset is with the user (lessee). __(AS19
ICAI) with the user (lessee).

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