Norms followed by banks are far stricter
CL Jose
THIRUVANANTHAPURAM: In yet another move that could help the financially embattled credit cooperative societies in the state to buy time, the Department of Cooperation has further watered down the already lenient provisioning norms for them.
Several credit societies in the state manage to survive by applying much lower provisioning against their non-performing assets (NPAs) compared with their banking counterparts.
The diluted provisioning they have been following allows them to showcase higher profits than what they ought to present, or profit in the place of a loss, in many cases.
Already, the market is agog over the happenings witnessd among the scores of credit cooperative societies across the state, like Karuvannur Cooperative society, where no one has a clue as to how far they have been following the provisioning norms.
Provisioning is the process where a certain amount has been set aside by the societies or banks (here societies) as a cushion to absorb the possible loss emanating from the non-performing assets (NPAs) or bad loans in their books.
Thus obviously, the size of provisioning will depend on the severity or age of the NPAs in the books of these entities (here credit societies). This means that the older the bad loans, the higher the amount of provisioning to be set aside by the societies.
One has to realize that the profit of an entity is computed after deducting the provisions from the operating profit as provisions represent anticipated losses or expenses that a company sets aside in its financial statements.
Since it’s quite logical to conclude that a higher amount needs to be set aside by a society as provisioning if the bad loan is older; a larger provisioning is bound to bring down the profitability or even push the societies into loss if the provisioning is done properly.
So let’s see in perspective what the Department of Cooperation has done through the recent circular.
Diluted provisioning
Concessions in provisioning have been announced for those societies that may land up in loss if they are to follow the extant (already existing) provisioning norms.
So about the loans drawn on a personal guarantee, where the loan dues are between one year and three years old, the provisioning requirement has been reduced from 10 per cent to 7.5 per cent.
What banks do
It would be quite interesting and relevant to compare how provisioning is required to be done for a comparable bad loan in the case of a bank that’s regulated by Reserve Bank of India (RBI).
In banking parlance, NPAs (bad loans) that are one year to three years old fall under the category of ‘Doubtful Assets’, and the provisioning demanded by such assets is in the range of 40 per cent to 100 per cent depending on whether secured or not.
Thus the comparison stands at 7.5 per cent versus 40-100 per cent in the cases of societies and banks respectively. In the case of NPAs of age between three years and 6 years the provisioning for societies has been reduced from 100 per cent to 80 per cent and for loans disbursed on collateral security, the provisioning against NPAs older than three years and up to 6 years, has been slashed from 50 per cent to 30 per cent.
In the case of banks, 100 per cent provisioning has been mandated by the RBI for bad loans older than three years no matter it’s secured or not.
Talking to businessbenchmark.news the secretary of a credit society in Thrissur, said most societies have swept huge bad loans under the carpet by applying the extremely lenient provisioning norms followed by these credit societies.
“A time may come, not before long, when these bad loans hidden under the garb of easy provisioning norms, will raise the specter of a deluge of losses,” he added.
Coop Socities: New provisionging norms may be a bigger torouble in the making
