Economics
Context: Recently, The Reserve Bank of India (RBI) published a discussion paper on “loan loss provision”, proposing a framework for adopting an expected loss (EL)-based approach for provisioning by banks in case of loan defaults.
About Loan loss provision:
- The RBI defines a loan loss provision as an expense that banks set aside for defaulted loans.
- Banks set aside a portion of the expected loan repayments from all loans in their portfolio to cover the losses either completely or partially.
- In the event of a loss, instead of taking a loss in its cash flows, the bank can use its loan loss reserves to cover the loss.
- An increase in the balance of reserves is called loan loss provision.
- The level of loan loss provision is determined based on the level expected to protect the safety and soundness of the bank.
- It will enhance the resilience of the banking system in line with globally accepted norms.
- It is likely to result in excess provisions as compared to a shortfall in provisions as seen in the incurred loss approach.
Source: Indian Express
Previous Year Questions
Q.1) With reference to the Indian economy, consider the following statements:
- If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
- If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
- If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.
Which of the statements given above are correct? (2022)
- 1 and 2 only
- 2 and 3 only
- 1 and 3 only
- 1, 2 and 3
