Appeals from banks to revise the norms for identification and classification of bad loans based on the commercial operation date of a project, have failed to find favour with the Reserve Bank of India (RBI).
The banking regulator has no plan to change the guidelines and will consider requests from banks on a case-to-case basis, senior officials at RBI said. “There is enough flexibility in the existing guidelines pertaining to the commercial operation date. Specific cases can be examined but it cannot be left open-ended,” said deputy governor Anand Sinha.
“If commercial production does not start on time, then the viability of the projects comes into question. Also, long-term projects are financed on floating rates and that is another source of risk. Banks should be able to identify these risks well in advance,” Sinha added.
Earlier on Tuesday, banks requested RBI to consider de-linking of non-performing asset (NPA) classification from the commercial operation date of a project.
The current norms state that a term-loan for an infrastructure project will be classified as NPA if the project fails to commence commercial operations within two years from the original date of commencement. For non-infrastructure project loans, the time allowed is one year.
“No other regulator does it, so why should we link it to the commercial production date. There are signs of pressure on the asset quality, and we took up with RBI that there was a need to revisit NPA identification and NPA classification norms,” said Pratip Chaudhuri, chairman of State Bank of India (SBI).
“on Tuesday, many projects, whether the account is standard or sub-standard, are linked with the commercial production date. I think this needs to be de-linked. One needs to look at the ultimate collectability of the debt relative to securities and cash flow generations.”
SBI was one of the worst affected in terms of asset quality deterioration in recent years. India's largest commercial bank's net profit plunged 99 per cent year-on-year in the fourth quarter of the last financial year, because it had to make more provisions due to deteriorating health of its loan book.
Chaudhuri's comments were echoed by Bank of Baroda's chairman and managing director MD Mallya. “We have made a submission and RBI has said they will examine it.” He said bankers had asked for de-linking commercial operation date from NPA classification across industries and not specific to any sector.
Bankers also admitted a sharp rise in rates may worsen quality of assets in the coming quarters. “NPA accretion will possibly get accelerated in the interest rate sensitive sectors, where rates comprise a significant part of the total cost. Real estate, education and vehicle loans could be affected,” Chaudhuri said.
According to Aditya Puri, managing director of HDFC Bank, while there was no systemic increase in NPAs, asset quality of banks may come under stress in the coming quarters because of higher rates.
