The Hindu Business Line : Banks urge RBI to relax asset classification norms

Mumbai, Jan. 13 Banks have moved the Reserve Bank of India to temporarily relax the asset classification norm in view of the severe downturn in the country’s economy. Fearing accretion to their bad loans portfolio, which in turn could have a serious knock-on impact in terms of provisioning and bottom-line, banks want RBI to revert, albeit for the short-term, to the earlier regime — whereby an asset would be classified as “non-performing” if interest and/or instalment of principal due remained unpaid for more than 180 days instead of the extant 90 days.

With the Index of Industrial Production — comprising basic goods, capital goods, intermediate goods, and consumer goods — slowing considerably to 3.9 per cent in the April-November 2008 period as against 9.3 per cent in the corresponding period last year and global economic slowdown weighing 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), bankers hold the 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.

Wary of risk

Notwithstanding the fact that banks, especially in the public sector, have brought down their lending rates at the Government’s behest to spur the economy, the cycle of lack of demand, production cuts, plant shut-downs, inventory pile-ups, and job-losses have led banks to become wary of the risk of defaults in repayments — resulting in a build-up of bad loans. Bankers are concerned that higher provisioning on account of NPAs would adversely impact their profitability.

RBI, in the latest Report on Trend and Progress of Banking in India (2007-08), has already cautioned that the downturn phase of a business cycle increases the possibility of credit losses, leading to higher provisioning requirements. The higher provisioning in the downturn phase may, thus, put pressure on the credit availability and accentuate the contraction phase of business cycle. “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,” said a top SBI official.

Tightened norms

The asset classification norm was last tightened about four years ago. In 2004, RBI stipulated that an asset would be classified as “non-performing” if interest and/or instalment of principal due remained unpaid for more than 90 days, instead of 180 days, in order to ensure sound asset quality in the banking system.

“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,” a senior IDBI Bank official said.

According to the RBI, the gross NPAs of scheduled commercial banks increased by Rs 6,136 crore in 2007-08 to Rs 56,435 crore as of March-end 2008. The RBI pointed out that the increase in gross NPAs was more noticeable in respect of new private sector and foreign banks, which have been more active in the real estate and housing loan segments.