Banks told to recognise bad assets quickly

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RBI directs lenders to provide for NPAs at first hint of stress

Rising bad loans have forced the Reserve Bank of India (RBI) to ask banks to recognise stressed accounts and ‘provide’ for them immediately. The central bank has clarified that provisioning should happen without any delay, and warned banks against provisioning in parts.

Provisioning is a prudential measure that requires banks to set aside money as a buffer just in case the account goes bust.

The central bank is also conducting a close scrutiny of banks’ books to identify if there is “greening” of accounts whereby banks roll over repayments to show them as standard, or restructure them even if there is no merit in the case. Greening is keeping such accounts standard despite turning stressed.

In many cases, banks are postponing the provisioning to report better profitability. A senior banker told Financial Chronicle, “Due to rising bad loans, Reserve Bank of India does not want the provisioning to happen in parts. Instead, it wants banks to set aside reserves against the account immediately so that banks are prepared with adequate capital if the account has be written off.”

The central bank is also seeking information from banks on the kind of collaterals that banks would be having on large accounts from stressed sectors like power, textiles and infrastructure and assessing whether the loan assets are adequately secured so that non-performing assets do not arise.

“Rising non-performing assets in the banking system are forcing banks to provision less and spread them over a few quarters to show better numbers, but the central bank is of the view that provisioning cannot be postponed so that banks have adequate resources to meet the requirements,” said another banker, who did not want to be quoted.

A loan becomes substandard if interest payments on it are not serviced for three months and remains in that category for a year during which banks have to provision at the rate of 15 per cent for secured assets. For non-secured assets, the provisioning requirement is 20 per cent.

From the second year, 25 per cent of the account falls into the doubtful category while 100 per cent would be non-secured doubtful assets. From the third year, the account will slip into loss account, where the bank has to provide for 100 per cent.

RBI has also made it mandatory for banks to share client information before lending to any borrower, especially large corporate borrowers from January 1, 2013. Failing to do so will invite penalties from the regulator.

Total gross non-performing assets (NPA) of the banking system stood at 3.25 per cent of total assets of Rs 49.50 lakh crore. Gross NPAs of public sector banks were 3.57 per cent of total advances, while restructured advances were 6.67 per cent of total advances. For private sector banks, gross NPAs are about 2.19 per cent of total advances and 1.06 per cent of total advances. Public sector banks have about 70 per cent of the total banking sector advances.


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