RBI raise the provisioning requirements of restructured loans.

The Indian banking industry has seen a large incidence of bad debts in recent times. The bad debts are especially more pronounced in the case of restructured loans. This had prompted the Reserve Bank of India (RBI) to raise the provisioning requirements on such loans to 2.75% a few months ago. But the increased provisioning did not allay the fears of the central bank. Now it has decided to raise the provisioning further to 5%. It has directed banks to increase provisioning in a phased manner. The first step would be to take the provisioning to 3.75% effective 31st March 2014. Then it would be increased to 5% in March 2015.

The apex bank has also revised the guidelines with regards to the guarantees provided for restructured loans. The increased provisioning requirements are in line with the RBI's conservative approach to banks. It would be better to be cautious than to repent later on. After all, bad debts could completely wipe out banks' net worth. We have already seen this happening in the developed countries and would definitely not want it to happen in India too.