What changed
Previously, UCBs followed different provisioning rates based on an old two-tier system (Tier I and Tier II). Now, under the new four-tier framework (Tier 1 to Tier 4), all UCBs must apply uniform provisioning rates: 0.25% for agriculture and SME advances, 1.00% for CRE, 0.75% for CRE-RH, and 0.40% for all other standard assets. Former Tier I UCBs, which had a lower 0.25% rate on 'other loans', are allowed to phase in the increase to 0.40% by March 31, 2025.
What it means for you
This harmonisation simplifies compliance for UCBs by removing tier-based differences in provisioning rates. For erstwhile Tier I UCBs, the staggered increase in provisioning on 'other loans' will gradually raise their provision coverage, impacting profitability in the short term. All UCBs now have a clear, uniform standard asset provisioning framework aligned with the revised four-tier regulatory structure.
What you must do
- Update your standard asset provisioning policy to reflect the new uniform rates for all four tiers effective April 24, 2023.
- If you are a former Tier I UCB, plan the staggered increase in provisioning on 'other loans' to 0.30% by March 31, 2024, 0.35% by September 30, 2024, and 0.40% by March 31, 2025.
- Ensure that provisioning for agriculture, SME, CRE, and CRE-RH advances is calculated at the prescribed uniform rates on a portfolio basis.
- Review and adjust your financial projections to account for the phased provisioning increase if applicable.
Who it affects
All Primary (Urban) Co-operative Banks (UCBs) classified under Tier 1, Tier 2, Tier 3, and Tier 4, Former Tier I UCBs that previously maintained 0.25% provisioning on 'other loans'
What are the new uniform provisioning rates for standard assets?
For all UCBs: 0.25% for direct advances to agriculture and SME, 1.00% for CRE, 0.75% for CRE-RH, and 0.40% for all other standard loans and advances.
How do former Tier I UCBs transition to the new 0.40% rate on 'other loans'?
They must increase provisioning in phases: to 0.30% by March 31, 2024, to 0.35% by September 30, 2024, and to 0.40% by March 31, 2025, based on outstanding as on March 31, 2023.
When do these revised norms take effect?
The guidelines are effective from the date of the circular, April 24, 2023.