The public sector banks dominated the banking system in 1990s but now the private sector controls about 80 percent of the banking assets.
This change has brought benefits in the form of increased competition, product innovation, technological enhancement and diversification of the business activities. But new risks have also been recognised in the sector.
This has required the adoption of international best practices by the banking units and DFIs in classification and provisioning against their loans and advances portfolios to further strengthen the soundness and ability of the banking system.
In this perspective, it has been decided to make following amendments in the existing classification and provisioning criteria prescribed under the Prudential Regulations:
i) The existing Annexure-IV of Regulation P-B of the Prudential Regulations for Corporate/Commercial Banking, Annexure-III of Regulation R-II of the Prudential Regulations for Small and Medium Enterprises Financing, Regulation R-14 (Auto Loans), Regulation R-23 (Housing Finance) and Regulation R-28 (Personal Loans) of the Prudential Regulations for Consumer Financing have been replaced with the A B, C, D and E, respectively.
This will result in the following changes in the existing criteria for classification and provisioning:
a) Elimination of OAEM category.
b) Revision of ageing criteria whereby now the loans /advances overdue by 90 days will be classified as Substandard, 180 days as Doubtful and one year or more as Loss.
c) Increase in provisioning requirement for substandard category to 25 percent
d) The revised criteria will be applicable to all types of financing facilities ie short, medium and long-term and to corporate, SME and consumer financing except Trade Bills (Import/Export or Inland Bills) and credit cards which will continue to be classified as ''''loss'''' if not paid/adjusted within 180 days from due date.
ii) The benefit of forced sale value (FSV) of collateral allowed under Para 4 of Regulation R-8 of the Prudential Regulations for Corporate/commercial Banking, Para 4 of Regulation R-11 of the Prudential Regulations for Small and Medium Enterprises Financing, and Regulation R-23 (Housing Finance) of the Prudential Regulations for Consumer Financing shall be available against the financing facilities of Rs 5 million and above only, with immediate effect.
Furthermore, the benefit of FSV of collateral under the aforesaid provisions of Prudential Regulations shall be further restricted to financing facilities of Rs 10 million and above only, with effect from December 31, 2008.
III) THE STATE BANK WILL Review the position to withdraw the benefit of FSV altogether after December 31, 2006 and separate instructions in this regard shall be issued to the banks/DFIs in due course.
3). All other instructions on the subject shall, however, remain unchanged.
The existing annexures - IV of Regulation R-8 of the Prudential Regulations for corporate /commercial banking, Para 4 of Regulation r-11 of the Prudential Regulations for Small and Medium Enterprises Financing, and Regulation R-23 (Housing Finance) of the Prudential Regulations for Consumer Financing will be available against the financing facilities of Rs 5 million and above only, with immediate effect.
Furthermore, the benefit of FSV of collateral under the aforesaid provisions of Prudential Regulations will be further restricted to financing facilities of Rs 10 million and above only with effect from December 31, 2006.
The State Bank will review the position to withdraw the benefit of FSV altogether after December 31, 2006 and separate instructions in this regard will be issued to the banks /DFIs in due course.