Banks request relaxation in asset classification norms

The Reserve Bank of India has been forwarded the request by the banks for the temporary relaxation in the asset classification norm in view of the severe downturn in the country’s economy. Banks have sent this request in view of fear of building up of their bad loans portfolio, which in sequence can have a serious knock-on impact in terms of provisioning and bottom-line, therefore banks want RBI to relapse, even though for the short-term, to the earlier regime - whereby an asset will be classified as “non-performing” if interest and/or installment of principal due remained unpaid for more than 180 days instead of the existing 90 days.

In the April-November 2008 period as against 9.3 per cent in the corresponding period last year the Index of Industrial Production — comprising basic goods, capital goods, intermediate goods, and consumer goods has slowed considerably to 3.9 per cent. And also the global economic conditions have weighed down India’s exports (which fell in November 2008 by an annual 9.9 per cent and in October 2008 by 12.1 per cent), therefore bankers are of view that RBI should pre-empt the NPA (non-performing asset) problem by allowing temporary accommodation on asset classification till the economic downturn blows over.

In spite of the fact the banks especially the public sector banks have reduced their lending rates at the Government’s behest to increase the economy, but the cycle of lack of demand, production cuts, plant shut-downs, inventory pile-ups, and job-losses have raised worries among the banks about the risk of defaults in repayments which in turn will result in building up of bad loans. Bankers are worried that the higher provisioning on account NPAs will adversely impact their profitability.

In its latest report on Trend and Progress of Banking in India (2007-08), RBI has already

RBI, in the latest Report on Trend and Progress of Banking in India (2007-08), has already signaled that the recession phase of a business cycle increases the possibility of credit losses, leading to higher provisioning requirements. The higher provisioning in the recession phase can thus, lay pressure on the credit availability and emphasize the retrenchment phase of business cycle. A top SBI official pointed out, “Business confidence is flagging. Signals of corporate stress are being thrown up in the economy in the form of lack of global and domestic demand, cutback in production, slowdown in exports, and job losses. The direct implication of this is that bad loans in the banking system may rise. Hence, temporary relaxation in the asset classification norm is desirable.”

Four years ago the asset classification norm were last constricted. In 2004, RBI specified that an asset probable be classified as “non-performing” if interest and/or instilment of principal due remained unpaid for more than 90 days, instead of 180 days, with an aim to ensure sound asset quality in the banking system.

A senior IDBI Bank official remarked, “Given that the economy is experiencing a slowdown, it would be apt if the RBI temporarily allows the banking system to revert to the asset classification norm as prevailing before 2004”.

As per RBI report, the gross NPAs of scheduled commercial banks had increased from Rs 6,136 crore in 2007-08 to Rs 56,435 crore as of March-end 2008. The RBI stated that the increase in gross NPAs was more evident in respect of new private sector and foreign banks, as they have done more vigorous lending in the real estate and housing loan segments.