Ad hoc provisioning may ease NPA blow for banks

The new 90-day norm pertaining to recognition of sticky assets is unlikely to hit commercial banks hard as they have already started making ad hoc provisions for meeting this norm, say analysts.

The 90-day norm will come into effect from March 31, 2004. Currently, banks recognise a loan as a non-performing asset if either principal or interest is overdue for two quarters or 180 days.

During the transition period banks have been making provisions to adhere to 90-day income recognition norm.

HDFC Bank has transitioned to the 90 day norm for NPA recognition in August 2003 and the overall impact of this was not very material, says Paresh Sukthankar country head, credit, market risk and HR, HDFC ank.. "The net NPA ratio of around 0.5 per cent of our gross advances is based on the 90 day norm," he added.

The lower NPAs have been due to a combination of factors starting with a tighter target market definition, to stronger credit approval and monitoring processes, to better problem recognition and remedial management efforts.

The bank has also had a provisioning policy which is much more conservative than regulatory requirements which has helped keep net NPAs even lower. Bank of Baroda, for instance, adopted the 90 day norm from December 2003.

The bank's net NPA as on December 31, 2003 was down to 3.46 per cent against 4.01 per cent in the corresponding period last fiscal. The bank has written off debt worth Rs 590 crore while it has recovered loans worth Rs 300 crore which has led to a reduction in the NPA levels.

A S Khurana general manager Bank of Baroda said that the bank aims at reducing the NPA level to 2 per cent by March 2004 and to nil by March 2005.

State Bank of India's net NPA level may go up marginally from 2.11 per cent to over 2.50 per cent once the bank opts for the 90-day norm.

Incidentally, three State Bank associates are set to record zero NPA by the year-end. The SBI family as a whole will have less than three per cent net NPA level.

Indian Bank's Association (IBA) senior vice president (policy) K Unnikrishnan said that the Reserve Bank of India (RBI) had asked banks to move to the 90-day norm three years ago and most banks have made adequate provisioning.

Hence, banks should have no problem to shift to the 90-day norm. However, he added that some co-operative banks could face the pressure.

Corporation Bank Ltd had adopted the 90-day non-performing asset (NPA) classification norm in December 2003. Despite the adoption of the 90-day NPA norms, in December 2003, the net NPA level of the bank decreased to 1.7 per cent from 2.4 per cent in the corresponding period last fiscal.