Micro Prudential Norms

Micro Prudential Norms- The main elements of prudential norms are:

Income recognition
Assets classification
Provisioning for loans and advances
Capital adequacy
Account of recovery
Treatment of depreciation

Commercial banks do not recognize income from non-performing assets on an accrual basis. Such incomes are booked only when they are actually received. If the balance sheet of a bank is to reflect the actual financial health of that bank, there has to be a proper system of recognition of income, classification of assets, and provisioning for bad debts on a prudential basis. “Micro-prudential regulation examines the responses of an individual bank to exogenous risks. It does not incorporate endogenous risk, and it neglects the systemic implications of common behavior. Micro-prudential regulation examines the responses of an individual bank to exogenous risks. It does not incorporate endogenous risk, and it neglects the systemic implications of common behavior.

The main focus of micro-prudential supervision is to safeguard individual financial institutions from idiosyncratic risks and prevent them from taking too much risk. The focus of the micro-prudential policy is the stability of individual financial institutions. By contrast, the focus of the macro-prudential policy is the stability of the financial system as a whole.

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