A fortnight from now, Indian banks will have to start charging their borrowers interest on loans on a monthly rest basis--replacing the prevailing practice of charging interest on a quarterly basis.
The Reserve Bank of India (RBI) has directed banks to start doing this from April 1, 2002, in the run-up to the 90-day (one quarter) norm for the recognition of bad loans from the year ending March 31, 2004.
At present, banks classify non-performing assets (NPA) if the interest has not been paid for two quarters (180 days). The RBI is pushing for the 90-day norm in line with international practices.
Banks have been lobbying hard against this move because they feel it will increase their quantum of non-performing assets. However, the RBI is in no mood to listen to them.
Early this month, it issued a directive to all commercial banks, asking them to switch over to charging interest on loans every month instead of on a quarterly basis from April 2002.
The RBI has, however, made an exception in the case of agricultural advances, where banks will continue to follow the existing practice of charging interest linked to crop seasons. The application of interest on monthly rest will be restricted to cash credit and overdraft accounts. At the time of switching over from quarterly to monthly rests, banks will also have to obtain consent letters/supplemental agreement from the borrowers for the purpose of documentation.
Banks have been directed to apply interest on monthly rest in the case of new term loans and other loans of longer or fixed tenor at the time of review or renewal of the loan accounts.
"The idea is to prepare the banks for the new regime. The borrowers will be encouraged to pay on a monthly basis. But our collection system is not good enough to support the new order," said a senior official from a leading bank. "While we will try to enforce this from April, we feel it will be difficult considering that today even on a quarterly rest basis, realisation of interest cheques can take as much as one month," he added.
However, most of the foreign banks operating in India and some of the new private banks have been charging interest on a monthly basis.
Bankers fear that once the 90-day norm is introduced, their NPAs will swell as the corporates are not in the best of health. Gross NPAs have been on the rise, standing to the tune of Rs 63,883 crore as of March 31, 2001, up from Rs 60,408 crore recorded in the preceding fiscal.
