What is gross slippage in banking

In banking lexicon, provisioning means to set aside or provide some funds to cover up losses if things go wrong and some of their loans turn into bad assets. Provisioning Coverage Ratio (PCR) refers to the prescribed percentage of funds to be set aside by the banks for covering the prospective losses due to bad loans. Earlier there was a bench mark Provisioning Coverage Ratio (PCR) of 70 percent of gross NPAs was prescribed by RBI, as a macro-prudential measure. Though, there is no such prescription now, it is good for the banks to go for higher PCR when they are making good profits, as building up ‘provisioning buffer’ is useful when non-performing assets (NPA) of a bank rise at a faster clip. The Reserve Bank advised the banks to segregate the surplus of the provision under PCR vis-a-vis as required as per prudential norms into an account styled as “countercyclical provisioning buffer”. This buffer is allowed to be used by the banks for making specific provisions whenever needed, of course, with the prior approval of RBI.

A coverage ratio of the bank will be measured by dividing net equity (equity minus net NPA) by total assets less intangible assets.

i.e.  Coverage ratio= (Equity- net NPA) / (Total assets – intangible assets).

Slippage Ratio: The slippage ratio is the rate at which good loans are turning bad; the credit cost is the amount a bank expects to lose due to credit risks Slippage ratio of a bank is calculated as under;

Slippage ratio= Fresh accretion of NPAs during the year /Total standard assets at the beginning of the year multiplied by 100

In agreement with the prudential norms for   loans & advances, provisioning should be made by the banks and financial institutions on each of their non-performing assets (NPA) based on asset quality.

The following article explains the definition of non-performing assets (NPAs), and basis on which accounts are classified into Special Mention Accounts (SMA) /sub-standard Assets, Doubtful assets, and Loss Assets. Income recognition and provisioning requirement are specified in the article.

Prudential norms for income recognition and provisioning of NPAs

Category: Risk ManagementBy Surendra Naik2 Comments