Friday, July 10, 2009

Banks ask RBI to ease provisioning norm that clumps together loans

Amid rising delinquencies, leading banks have asked the Reserve Bank of India (RBI) to relax provisioning norms for home loans and other assets.

A lesser-known accounting norm requires banks to provide for the entire exposure to a borrower if one of the loans given to her turns bad. For instance, if a customer defaults on credit card dues, the bank will have to classify not just the card outstandings, but also the home and auto loans taken by the same borrower as non-performing assets (NPAs). This is despite the fact that the borrower may have been regular in paying EMIs for home and auto loans

Banks have now asked the RBI to delink the bad loan and good loan for the purpose of asset classification and provisioning. A higher provisioning boils down to lower income for banks.

This was suggested by CEOs of large banks during a recent meeting with RBI governor D Subbarao. The move comes at a point when banks are battling a slowdown in credit growth. With loan demand from corporates failing to take off, some large banks are giving a new push to retail loans.

RBI norms stipulate that if a borrower defaults on any loan facility, all other facilities taken by this borrower should be treated as bad loans. Once a loan is classified as a bad account, the bank has to set aside 10% of the outstanding loan as a provision. This not only hurts the bank’s bottomline, but also enlarges the ratio of bad loans — a stigma on a lender.

Banks have told RBI that if a borrower fails to service a particular loan facility, all other facilities should not be classified as substandard provided the borrower makes regular payments on them. “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,” a senior banker said, on condition of anonymity.

In fact, some banks also suggested that a similar relaxation be granted for loans to corporates.

In the case of corporate loans, if a borrower fails to pay the interest component on working capital, the term loan or any other facility taken by the corporate is classified as an NPA. At present, an exception is made only in the case of financial institutions, whereby provisioning is linked to the facility taken by the borrower.

Some banks also suggested that even if a home loan borrower does not make EMI payments for 90 days, they should be allowed to treat the account as a standard asset if instalments have been paid for earlier periods. At present, the RBI follows a 90-day norm, wherein an instalment not paid within 90 days from the due date has to be classified as an NPA on the 91st day.

For instance, a loan instalment due on April 1, and the remaining unpaid till July 1, has to be categorised as a bad loan. “A bank with a large retail home loan portfolio suggested to the RBI that so long as a borrower pays instalments due in, say, February and March in the April-June quarter, RBI should allow banks to classify the loan as a standard asset,” said a senior banker who was present at the meeting.

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