Detailed norms for bad loan transfers in the offing

The Reserve Bank of India (RBI) is likely to come out with comprehensive guidelines on transfer of non-performing assets (NPAs) among banks.

At present, it is a restricted activity and usually new generation private banks buy stressed assets from their public counterparts to build up a bigger credit portfolio.

Usually in such deals, one bank buys stressed assets from another bank at a discount and, thereafter, classifies it as standard assets in its books of accounts.

It is a win-win situation for both the parties involved as the seller can pare its NPA level, while buyer raises its loan portfolio level.

The Asset Reconstruction Company of India Ltd (Arcil) is the only designated entity for buying non-performing assets from the banking industry. Even though some banks indulge in such deals, lack of clear guidelines pose problem for supervision.

According to sources, the RBI is not comfortable with the way some banks classify NPAs after purchasing it from other banks.

The guidelines are expected to notify a timeframe for treating such assets as standard. Moreover, if the recovery could process does not yield any result, such assets should be downgraded, said the source.

The new norms may permit sale of a bundle of NPAs at different stages of stress. Another significant area is provisioning requirement for such assets in conforming with the degree of impairedness. With Basle II norms' implementation round the corner, this area needs some clarity, said a senior banker.

Often new private banks resort to buying NPAs to boost their credit portfolio and inflate the balancesheet at the end of the financial year.

Banks with small capital base use this method to get rid of their NPAs and relieve themselves of the huge liquidity requirement for provisioning towards such bad accounts.

This way of ensuring the quality of assets has picked up in pace after the RBI tightened the NPA accounting norms directing banks to classify an asset as NPA and provide for it if payment of interest is delayed by more than 90 days against earlier norms of 180 days.

The RBI is also in the process finalising the list of external credit rating agencies, which would be accredited for rating the banks in line with the requirements of the Basle II norms.

While internationally active and top-rated banks can have internal credit rating, the rest will have to adhere to ratings of external credit rating agencies.