Business Daily from THE HINDU group of publications
Friday, Jun 23, 2006
Business Daily from THE HINDU group of publications Friday, Jun 23, 2006 |
|
|
|
|
|
|
|
Money & Banking
-
Trends RBI warns banks against using floating provisions to pep up balance sheet Our Bureau
Mumbai , June 22 The Reserve Bank of India has warned banks against using their floating provisions to enhance their balance sheets. Floating provision is the funds that banks maintain in excess of their normal provisions for standard and bad assets. Most banks maintain floating provision and this is reflected in their annual balance sheets. Banks sometimes use the floating provision to write off NPA accounts and sometimes to clear fraud accounts, said a senior bank official. Sounding a note of caution, RBI issued a notification on Thursday, which said, "The use of floating provisions to set-off against provisions required to be made as per extant prudential guidelines appear to have been used in smoothening of profits in some cases." As per the revised instructions issued on Thursday, "floating provisions can be used only for contingencies under extraordinary circumstances for making specific provisions in impaired accounts after obtaining board's approval and with prior permission of RBI." Analysts believe that RBI has issued the revised instructions as it expects banks may find it difficult to maintain higher level of profitability. This may lead them to use the floating provisions to window-dress their balance sheets. The bank's board should lay down approved policy stipulating the level to which floating provisions can be created. Banks should also hold floating provisions for advances and investments separately and guidelines prescribed will be applicable to floating provisions held for both advances and investment portfolios, RBI said. "Floating provisions cannot be reversed by credit to the profit and loss account. They can only be utilised for making specific provisions in extraordinary circumstances," RBI said.
Disclosures
Banks should make comprehensive disclosures on floating provisions in the notes on accounts to the balance sheet and include details like opening balance in the floating provisions account, quantum of floating provisions made in the accounting year, purpose and amount of draw down made during the account year and closing balance in the floating provisions account, said RBI, in its notification. RBI also said that if a bank voluntarily makes specific provisions for advances at rates higher than rates prescribed, these should not be considered as floating provisions.
More Stories on : Trends | RBI & Other Central Banks
Article E-Mail :: Comment :: Syndication :: Printer Friendly Page
|
Stories in this Section |
|
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription Group Sites: The Hindu | Business Line | Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |
Copyright © 2006, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line
|