Can’t bank on them

When the banks are reporting one fraud after another committed on them, the Reserve Bank of India has come out with fresh non-performing asset norms, which has added further pressure on the banks. Until some years ago, banks were allowed to recover the amount due within four quarters from its due date. Over the period, the norm has been changed and the following table provides the ‘past due’ norms adopted.

The NPA rule says simply this: when interest or other due to a bank remains unpaid for more than 30 days, the entire bank loan automatically turns a ‘non-performing asset’. This means that the banks cannot charge any further interest in the account and take it to the Profit and Loss Account. Moreover, they have to make a provision from the profit earned from other accounts and operations to cover the potential future loss on account of bad debts.

No doubt, it is a sound practice to book only the interest actually recovered to the income account. But the time to recover the dues cannot be decided arbitrarily. When it was prudent to allow 90 days time until recently for recovery of dues, what has changed recently to make it as 30 days?

It seems that we are adopting some global practices blindly without verifying whether these are suitable to our country. When the recovery period is changed from 90 days to 30 days, there is going to be a huge pressure on the banks. The NPA figures may increase manifold. Many banks are set to declare net loss of huge amount.

It will not be out of place to make some comparison from other fields. Say an upper limit of Body Mass Index of 25 is considered normal today for a healthy individual. Suddenly, if the medical fraternity changes this to 23, what happens? Many people will fall under ‘over-weight’ category. Is it not? But how one’s health has changed overnight from normal to over-weight? At least in the case of science and medicine, there may be some scientific reason to change the norms. There is no such case in the NPA norms prescribed by the RBI.

Globalisation is the order of the day. Agreed. But we have to keep in mind our local conditions. It is not clear when the Indian economy is not performing well, how the recovery can be better. People still claim that normalcy is yet to be restored after demonetisation. Instead of relaxing the NPA norms, tightening these norms will kill banks.

Our banks’ lending is not only based on cash flow and profit but also on tangible security, unlike in western countries. Hence, valuation of securities and realisation of such securities are important in classifying the loans as NPA. Norms applicable for investment banks cannot be applied for commercial banks. In other countries, there is no directed lending and we have our priority sector targets.

The new norms suggested by RBI, will put pressure not only on government banks but also on private banks and Non Banking Finance Companies and no one exactly knows what will be the impact on their balance sheets. This will have disastrous effect on the banking system in India.

Instead of changing NPA norms, the Government and the RBI must ponder over how to hasten the judicial process, which will enable banks to recover the dues in time. When the RBI has put a time limit for recovery, can’t the Government set a time limit for judicial cases involving banks?

The writer is a retired banker

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