The Hindu Business Line : Banks trim NPAs despite stiff norms

Bad loans of public sector banks, which declined by about Rs 2,400 crore in 2002-03, has declined by another Rs 2,500 crore in 2003-04. With advances rising 16 per cent, the proportion of bad loans has fallen significantly and the balance sheet of public sector banks now appears healthier than ever.

Notwithstanding the rosy picture depicted by the decline in bad loans, managing non-performing assets appears to have become tougher in 2003-04.

Additions to bad loans rose 13 per cent compared to a paltry 2.5-per cent rise recorded in 2002-03. If this has not been reflected in a rise in bad loans, it is because write-off/improvement of previously generated bad loans has increased 13 per cent.

Put that in banker speak and you will know that reduction in gross non-performing assets was a tad more than the additions.

What is unique about this year's performance is that the norms for recognition of bad loans have been tightened. Banks began recognising a loan as non-performing when there is non-payment of interest or principal for 90 days. The earlier norm allowed borrowers the liberty of 180 days for such repayment.

The transition was expected to be difficult, considering that borrowers were not used to such discipline earlier. Most banks expected their gross non-performing assets to increase by about 10 per cent because of the changeover. SBI alone had expected to add a little over Rs1, 000 crore because of the transition.

Actual performance in the form of fresh bad loans generated confirms that the transition has, indeed, been tough for both banks and borrowers.

Did borrowers cooperate to help banks? The Corporation Bank Chairman and Managing Director, Mr Cherian Varghese, said for banks such as his, the transition has been smoother because of following the US GAAP accounting norms.

Besides, the Reserve Bank of India had even a year ago asked banks to shift to charging interest on a monthly basis from the quarterly system followed earlier.

He added, "There is greater awareness on the part of the borrower and a better degree of follow-up from our side. We have seen how effective the private moneylenders model has been. The key is to keep following up."

For effecting reductions in gross non-performing loans, banks have to recover the money in cash by selling the asset, upgrade the account because repayments have started to come in or write off the amount.

The first option has not been used much, hampered as banks were by the prolonged battle on the Securitisation Act. According to bankers, most of the reduction has come through upgradation and write-offs.

However, some banks have also been able to use the newly started asset reconstruction companies to offload a part of their bad loans.

Mr Varghese said, "Sale to asset reconstruction companies is one more window for us. Pricing, however, is also an important issue. If the discount is too large, we may not go for it."

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