What is Provisioning coverage ratio (PCR)?
In December 2009, RBI advised banks to achieve a provisioning coverage ratio (PCR) of 70 per cent. Prior to that, different banks were having different coverage ratios. The 70-per cent PCR was introduced by RBI to have some sort of uniformity across banks. The coverage ratio was intended to achieve a counter-cyclical objective by ensuring that banks build up a good cushion of provisions to protect them from any adverse shocks if the economy goes in to a downturn.
As per RBI norms, banks were supposed to achieve PCR of 70 per cent by 30 September 2010. But, some banks are yet to achieve this ratio even as lately as of 30 June 2011. RBI allowed them more time on a case-by-case basis.
PCR is calculated as a ratio of total provisions to gross non-performing assets of a bank and is indicative of the extent of funds a bank keeps aside to cover loan losses. The higher the PCR, the stronger the bank’s balance sheet.
In April 2011, RBI advised banks to segregate the surplus of provisions under the PCR vis-a-vis as required as per prudential norms as on 30 September 2010, into an account styled as “counter-cyclical provisioning buffer.”
As per RBI norms (May 2011), the provisioning coverage ratio of 70 per cent is with reference to the gross NPA position in banks as on September 30, 2010; the surplus of the provision under PCR vis-a-vis as required as per prudential norms, should be segregated into an account styled as “countercyclical provisioning buffer”; and banks will be allowed to use this buffer for making specific provisions for NPAs during periods of system wide downturn, with the RBI’s prior approval.
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