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Tuesday, May 25, 2004

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Banks gear up to bring down net NPA levels

C. Shivkumar

Bangalore , May 24

MOST banks are expected to bring down their net non-performing assets to less than one per cent by the end of this fiscal year on the back of treasury profits.

Banking sources said that the Reserve Bank of India has already been persuading all the banks to conform to this level by this year-end. Most banks have already managed to bring their net NPAs down substantially by making large provisions out of treasury incomes and out of the profits earned from the securities buyback programme of the Government last year.

As a result, banks have brought down their net NPAs to below 3 per cent last fiscal.

This year, most of them have been asked to complete the arrears in provisioning by keeping a check on dividend payments. Presently, even the weakest banks have managed to make provisions in excess of 60 per cent, even after conforming to the latest 90-day norm in line with international standards.

For the last financial year, profits of the banking sector have been substantially driven by treasury incomes. But some of the banks have generally been wary of making large provisions out these profits. This was because certain tax concessions were restricted. Under Section 36 (viii) of the Income Tax Act, provisions for non-performing assets are exempted up to a ceiling of 10 per cent up to 2005.

But most banks have now decided to take the call and make the large provisions on a "one shot basis" and complete the provisioning requirements despite the non-availability of the tax exemption.

The sources said that the one of the major factors that prompted banks to take this step was to accelerate the transition to the Basel II regime by the beginning of the next financial year. During this period, the asset risk regime is expected to become a dynamic. This implied that the banks would have to make provisions on a value at risk basis. Consequently, the provisions requirement would have to be completed before that period and the balance sheets would have to be cleaned up.

Besides, bankers said that some of the assets that had been fully provided would be sold to the Asset Reconstruction Companies at the current discounts. This was also because, given the current interest rates, bankers believe that they would be in a position to obtain favourable discounting rates. Further, there was also the fear that the tax concessions was unlikely to be extended by 2005.

Although most of the banks have sought an extension of the provision, bankers are reconciled to a rejection of their requests, the sources said.

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