Banks to make graded higher provision for NPAs

The RBI has mooted the introduction of a graded higher provisioning requirement according to the age of banks’ non-performing assets (N...

The RBI has mooted the introduction of a graded higher provisioning requirement according to the age of banks’ non-performing assets (NPAs), included under ‘doubtful for more than three years’ category. This norm would be effective from March 31, 2005.

As on date, banks are required to make provisions on NPAs on a graded scale based on the age of a bad loan. However, in respect of ‘‘doubtful assets for more than three years’’, the provisioning requirement on the secured portion remains unchanged at 50 pc, till it is identified as a loss asset. With the enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the chances of recovery of an asset reducing over a period of time, it is essential that banks expedite recovery of NPAs.

The new norm could have a negative impact on banks’ profitability. In the fiscal ended March 31, 2004, banks have made additional provisions towards NPA to reduce it below the 3 pc mark. The move has impacted the earnings of these banks for the fourth quarter and the fiscal ’03-04. The higher provisions have also been due to the implementation of 90-day NPA norms for the banks effective from March 31, 2004. On wilful defaulters, the RBI has clarified that the classification of borrowal accounts and the redressal mechanism are two distinct processes —comprising identification of defaults as wilful with clear-cut reasons, and providing an opportunity to the borrower to make a representation before being classified as a wilful defaulter.

At present, banks and FIs form a committee headed by the executive director for classification of borrowal accounts as wilful defaulters and create a redressal mechanism in the form of a committee headed by the chairman & managing director.