RBI issued a Notification to enforce Norms on Creation of Defence Mechanism by Banks

The Reserve Bank of India (RBI) issued a notification on 22 April 2011 to put into force the norms on creation of the defence mechanism by banks. The apex bank asked all the banks to create special buffers to be used by banks for making specific provisions for bad loans during system-wide downturns.

The RBI expressed that it wants banks to create the counter-cyclical provisioning buffer to be set up out of any surplus available after complying with the stipulated 70% provision of coverage ratio (PCR) of the gross non-performing assets as of September 2010.

The RBI notification mentioned that the surplus provisions under PCR should be segregated into an account and the computation of the prescribed account will be undertaken as per the format prescribed by the RBI.

The new guideline is basically in the context of Basel III requirements. The Basel III requires more aggressive capital provisioning, particularly when the going is good for banks. The RBI is always ahead of the curve when it comes to the implementation of prudential norms.
The central bank had earlier argued that there is a realisation from a macro-prudential perspective that banks should build up provisioning and capital buffers in good times, that is, when higher profits can be used for absorbing losses in a downturn.