The Reserve Bank of India (RBI) has turned down suggestions to relax rules for recognising non-performing assets (NPAs) by doubling the duration to 180 days. RBI feels such a move will affect banks’ financial health.
At present, banks treat a loan as an NPA if the payment is overdue for 90 days. Companies, especially small and medium enterprises (SMEs), had suggested that a loan should be treated as an NPA if it was overdue for 180 days.
SMEs had suggested the move because they were facing cash flow problems due to a slowdown in demand in domestic and overseas markets, resulting in repayment problems.
The central bank was unlikely to agree to this relaxation, said sources close to developments, because of its efforts to align prudential norms in Indian banking with international standards.
“Therefore, diluting the NPA norms for SMEs is not considered as a step in the right direction at this juncture,” RBI said in a letter to the Indian Banks’ Association, the industry lobby that had communicated SMEs’ demands.
The central bank has also turned down a proposal to grant moratorium on all term loans extended to SMEs for one year.
Explaining why it had decided against the move, RBI said “multi-dimensional steps” have been taken to infuse liquidity into the financial system to ensure credit availability to productive sectors of the economy.
Sources added that RBI has already allowed banks to classify loans, which are restructured twice, as a standard asset.
RBI said tightening guidelines, improvement in asset origination and stringent monitoring and recoveries have helped banks rein in slippages. As a result, its data show that gross NPAs as a percentage of gross advances have declined from 5.2 per cent in 2005 to 2.3 per cent in 2008.
However, the last financial year saw gross NPAs for the Indian banking sector rise for the first time since 2001-02.
Banks had registered rapid credit growth during the previous three years, which is partly blamed for the slippage. Besides, a hardening of interest rates has also resulted in a rise in bad debts.
At the end of March 2008, credit extended by scheduled commercial banks to 85,187 sick SMEs was estimated at Rs 13,849 crore. Of this, 4,210 units, with an outstanding of Rs 247 crore, were found to be viable.
Banks placed 1,262 units with an outstanding credit of Rs 127 crore under nursing programmes. According to the RBI data, 75,829 units with outstanding of Rs 13,462 crore were found to be unviable.
