The Presidents/ Chief Executives
All Banks/ DFIs

Dear Sirs/ Madam,

AMENDMENTS IN PRUDENTIAL REGULATIONS –
CLASSIFICATION AND PROVISIONING FOR ASSETS

This refers to BSD Circular No. 2 dated June 03, 2010 and Prudential Regulation R-8 for Corporate and Commercial Banking, Prudential Regulation R-11 for Small and Medium Enterprises (SME) Financing, and Prudential Regulation R-22 for Consumer Financing.
2. It has been decided to revise the instructions on provisioning against classified assets as follows:

i. Allow benefit of Forced Sale Value (FSV) of eligible collaterals / securities held against Non Performing Loans (NPLs) from the date of classification for calculating provisioning requirement with effect from 30-09-2011 as under:

Category of Asset	Benefit of FSV allowed from the date of classification
a. Prudential Regulation R-8 for Corporate / Commercial Banking and Prudential Regulation R-11 for SME Financing:
Mortgaged residential, commercial, and industrial properties (land & building only)	75% for first year 60% for second year 45% for third year 30% for fourth year, and 20% for fifth year
Plant & Machinery under charge	30% for first year 20% for second year, and 10% for third year
Pledged stock	40% for three years
b. Prudential Regulations R-22 for Consumer Financing:
Mortgaged residential property	75% for first and second year 50% for third and fourth year, and 30% for fifth year

ii. Waive the condition that full-scope valuation shall not be more than one year old at the time of classification.

3. Accordingly, the following Prudential Regulations stand amended and are attached herewith:

a. R-8 (Para 4) and Annexure IV and V of Prudential Regulations for Corporate and Commercial Banking;

b. R-11 (Para 4) and Annexure III and IV of the Prudential Regulations for SME Financing; and

c. R-22 of the Prudential Regulations for Consumer Financing (Housing Finance).

4. While Banks/DFIs may avail the benefit of FSV for provisioning, the profit arising from availing the benefit shall not be available for the payment of cash or stock dividend. Further, details and impact of the FSV benefit in provisioning shall be adequately disclosed in the notes to the financial statements.
5. All other instructions on the subject shall remain unchanged.

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