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Prudential norms for banks on creation and utilisation of floating provisions

Reserve Bank of India in it's notification dated 13th March 2007 has clarified that banks can use the floating provisions only for contingencies under extra-ordinary circumstances for making specific provisions in impaired accounts after obtaining board’s approval and with prior permission of RBI.

To facilitate banks’ boards to evolve suitable policies in this regard, RBI has notified that the extra-ordinary circumstances mentioned refer to losses which do not arise in the normal course of business and are exceptional and non-recurring in nature. These extra-ordinary circumstances could broadly fall under three categories viz. General, Market and Credit.

Under general category, there can be situations where bank is put unexpectedly to loss due to events such as civil unrest or collapse of currency in a country. Natural calamities and pandemics may also be included in the general category. Market category would include events such as a general melt down in the markets, which affects the entire financial system. Among the credit category, only exceptional credit losses would be considered as an extra-ordinary circumstance.


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