The Reserve Bank of India (RBI) in a circular issued to banks on Wednesday, informed that the provisions for accounts referred to National Company Law Tribunal (NCLT) were reduced to 40% of dues of secured loans at the end of March from the earlier 50%. This is a relief for lenders with loan defaulters as it will help these banks strengthen their financial results for the quarter ended March.
However, according to an Economic Times report, this provision is temporary and will go back to 50% for the June quarter. There is no change in provision for unsecured loans. A provision is a back up facility were a bank sets aside some money from its gross profit in order to protect itself, incase a borrower fails to repay the loan. This provision is set by the RBI.
By reducing the provision, banks can not redirect the funds in other capital requirements.
As a result of this relief, bank stocks experienced a positive boost during the market opening. The Nifty Bank Index was up by 1.12% at 24,000 around 9:45 am as all its component stocks were green.
Bank of Baroda was up by 1.93%, Yes Bank was up by 1.74%, IDFC Bank was up by 1.66% and Induslnd Bank by almost 2%.
The other gainers were:
- Kotak Mahindra Bank + 1.52%
- Federal Bank +1.48%
- State Bank of India +1.29%
- Punjab National Bank +1.17%
- RBL Bank +1.09%
- HDFC Bank +1%
- Axis Bank +0.82%
- ICICI Bank +0.63%
RBI's decision, backed by reduced tensions around trade war and the positive opening of Asian stock markets benefited the stock markets here in India.