There is improvement in delinquency thus the leading banks have urged the Reserve Bank of India to relax provisioning norms for home loans and other assets.
According to norm banks are required to classify the entire loans given to the borrower as non-performing assets (NPAs) if one of the loans given to borrower turns bad. For instance a customer defaults on credit card dues the bank will not only classify the card out standings but also the home and auto loans taken by the same borrower as non-performing assets (NPAs), in spite of the fact the borrower might have been paying the EMIs for home and auto loans.
Banks are now requesting the RBI to delink the bad loan and good loan so that the classification and provisioning of the assets can be done. The suggestion was given by CEOs of large banks when they met RBI governor D Subbarao. The point has been raised at that time when banks are battling a slowdown in credit growth. The loan demand from corporate is still low, whereas some large banks are trying to give push to retail loans.
According to RBI norms in case a borrower defaults in repaying any loan EMI, all other facilities taken by this borrower shall be treated as bad loans. Once a loan has been categorized as a bad account the bank has to set aside 10% of the outstanding loan as a provision. Therefore in this process not only the end result of the bank gets upset but also increases the ratio of bad loans – a dishonor to a lender.
Banks in their suggestion have told the RBI that in case a borrower is not able to repay a particular loan EMI; all other facilities shall not be classified as substandard if the borrower is making regular payments on them. An anonymous senior banker told, “This happens very often, when a customer has taken both a credit card loan and a home loan from the same bank. At times, due to a dispute on credit card payments, a customer may not pay card dues for some months, but may continue to service home loan dues”.
On the other hand some of the banks have also suggested that a similar relaxation should be given for loans to corporates. Regarding corporate loans, if a borrower is unable to pay the interest component on working capital, the term loan or any other facility taken by the corporate is classified as an NPA. Currently, an exception has been given only in the case of financial institutions; in this the provisioning has been linked to the facility taken by the borrower. Some banks also gave suggestion that even in case a home loan borrower defaults on EMI payments for 90 days, the bank should be permitted to treat the account as a standard asset if the borrower has paid the installments for earlier periods. Currently, the RBI follows a 90-day norm, where an installment is not paid within 90 days from the due date has to be classified as an NPA on the 91st day. For instance, a loan installment due on April 1, and the installment remains unpaid till July 1, has to be classified as a bad loan. A senior banker who attended the meeting informed, “A bank with a large retail home loan portfolio suggested to the RBI that so long as a borrower pays installments due in, say, February and March in the April-June quarter, RBI should allow banks to classify the loan as a standard asset”.
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