(a) No provisioning is required on Standard Assets as these are performing assets and no problems in dealing with such accounts. However, as per RBI guideline a general provision of 0.25 per cent (one quarter of a per cent) is to be maintained by banks in respect of this category of assets from the year ending March 2000.
(b) A general provision of 10 per cent of the total outstanding is required to be maintained in respect of sub-standard assets.
(c) Provisioning on Doubtful Assets is required to be done based on 2 classifications.
(1) Loans and Advances which are not covered by any securities, i.e., unsecured Loans and Advances, provisioning is required for 100 per cent of value;
(2) Secured Assets but classified as Doubtful Assets. 20 to 50 per cent provisions are required on the basis of age of such assets.
(d) 100 per cent provisioning is required on Loss Assets.
The percentages relate to outstanding balances in the respective category of assets. Significance of Provisioning
Provisioning is allocation of money every year to meet a possible future loss. The performance of business units is not the same every year. It depends upon various political, economic and business factors. If there is serious failure of business in a row of years, then many business-borrowers may fail to payback their loan to banks.
When the banks write off such loans in a year or two, it will post huge losses depending upon the size of loans written off. This will not only distort the performance of the bank for that year but also comparative performance with previous years become difficult.
More so, in banking industry a big loss in a year for a bank may lead to a run on the bank affecting its own survival itself.
Hence, banks are advised to evaluate their various loan accounts on balance sheet date into the four categories mentioned above and depending upon the period for which the loans are impacted, provisioning is made. This annual provisioning acts as shock absorber and obviate the need for writing off big amounts in a year or so.