The Reserve Bank of India (RBI) on Wednesday tightened the prudential norms for banks and raised provisioning requirement for bad loans by up to 10 per cent, a development that would impact bottom lines of banks.

Advances classified as sub-standard will attract a provision of 15 per cent against the existing 10 per cent, the RBI said in a notification.

An asset would be classified as sub-standard asset, if it remains non-performing for a period of 12 months.

Thus, for example, a sub-standard loan in secured category of Rs.100 would now attract provision of Rs.15 against the earlier provision of Rs.10, said an analyst.

“At the same time, the unsecured exposures classified as sub-standard assets will attract an additional provision of 10 per cent that is a total of 25 per cent as against the existing 20 per cent,” it said.

In case of doubtful loans which remains non-performing for 24 months, the provision requirement varies from 25 per cent to 100 per cent.

An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.

If the asset has remained doubtful for one year, it would attract a provision of 25 per cent against 20 per cent.

Provision for doubtful loans up to three years has been enhanced from 30 per cent to 40 per cent.

It is 100 per cent in the case of such assets remained in doubtful category beyond three years, it said.

In cases of restructured accounts classified as standard advances, in the first two years from the date of restructuring would attract loan provisioning of 2 per cent as compared to up to 1 per cent.

The increase in provisioning requirement would have direct bearing on the net profit of banks and the profitability is expected to be hit by 15-20 basis points, a senior official of a public sector bank said.

High provisioning would reduce the operating profit of banks and eventually the net profit would be impacted.

The notification comes in after RBI Governor D. Subbarao proposed to enhance the provisioning requirements for the following categories of non-performing advances and restructured advances.

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