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RBI Tweaks NPA Divergence Disclosure Norms for Banks

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The Reserve Bank of India (RBI) has made life a little easier for banks by tweaking the rule on bad-loan divergence disclosures. Banks’ disclosure of divergences, mandated by the RBI, aims at improving the transparency in asset classification and preventing under-reporting of bad loans. The central bank on Monday appears to have diluted the rule a bit without compromising the intent. “Some banks, on account of low or negative net profit, are required to disclose small divergences, which is contrary to the regulatory intent that only material divergences be disclosed,” RBI said.
It told banks to disclose divergences when the additional provisioning for bad loans assessed by the RBI exceeds 10% of the reported profit before  provisions and contingencies for the reference period, instead of the earlier rule of 15% of the published net profits after tax. There was no change in the second condition: That additional gross NPAs identified by RBI exceed 15% of the published incremental gross NPAs for the  reference period. “This is clearly in line with substance over form. Some of the state-run banks were needed to report even minor non-material differences, primarily because they were making losses or hardly making profit on account of large provisioning pressure. This could have led to conflicting signals to the market. The  current notification would obviate the need for the same,” said Prakash Agarwal, director financial institutions, India Ratings.
Earlier, public financial statements with material divergences in banks’ asset classification and provisioning from RBI rule did not depict the true and  fair view of the financial position of the bank. For the last couple of years, the central bank used to assess compliance by banks with extant prudential  norms on income recognition, asset classification and provisioning as part of its supervisory processes.
The Economic Times, 2nd April 2019

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