RBI may ease bad-loan recognition norms and let banks reclassify borderline cases as standard loans

MUMBAI: The Reserve Bank of India may be poised to throw a lifeline to banks by easing tough bad-loan recognition norms, enforced as part of its asset-quality review, following an improvement in the behaviour of some big-ticket borrowers, said two people with knowledge of the plan.

Banks have reported poor earnings in the past few quarters following the RBI diktat to provision adequately for bad loans — which have risen to record highs at some lenders —as part of the cleanup exercise.

The regulator is also contemplating whether to let banks reclassify some ‘borderline’ cases as standard loans, where repayments were missed due to reasons outside the control of borrowers such as governmental department delays, said the people cited above. It’s not clear how many such cases the RBI will permit.

With most dodgy accounts having been classified as bad loans, banks have sought to convince the regulator that they have met the target of the asset-quality review.


Any relaxation of the bad-loan recognition rules could possibly lower provisioning requirements and boost earnings at banks.

Thousands of crores of rupees set aside against bad loans, even for borderline cases, have eroded their capital base, banks have told RBI, said the people cited above.

“If an account is sub-standard in another bank’s book and standard in my book, I as a bank should not be expected to take a similar provisioning hit. We have communicated that to RBI,” a banker told ET on condition of anonymity. “Overall, we have sought more leniency from the Reserve Bank. Lot of projects have suffered delays due to environmental issues (and) we are expecting some relaxation from the RBI.”

There was no response to queries sent to the central bank. RBI Governor Raghuram Rajan’s diktat last year to proactively declare many big accounts as bad loans for various reasons, including those “gaming the system” by borrowing from one bank to pay another, had led to heartburn among bankers. In some cases, the loans had been given to projects that were delayed due to approvals and other processes.

Banks, especially the state-run ones, posted record losses in the fourth quarter ended March and had to set aside vast sums against potential defaults. Total losses posted by the top seven state-run banks amounted to Rs 17,792 crore in the March quarter, with provisioning at Rs 44,156 crore.

"The entire impact of the asset quality review has been taken in the fourth quarter,” State Bank of India Chairman Arundhati Bhattacharya said after its earnings announcement. “We have done a lot of cleanup as a result of which loan provision has gone up by 143%. We have… gone through account by account to try and determine what are the weaknesses and try and recognise all of them as proactively as possible.”

A record Rs 30,313 crore surge in bad loans pulled State Bank of India’s March quarter net profit down 66% to Rs 1,264 crore. The government is also working on ways to ease the burden of banks, though it is a bit cagey on providing more capital to them without witnessing material changes in functioning. Finance Minister Arun Jaitley had proposed to invest Rs 70,000 crore in banks as equity capital in the February Budget.

He said on Monday that banks would be supported in their bid to resolve bad loans after a meeting with the heads of state-owned lenders.

“The government is committed to helping banks in this regard. IBA (Indian Banks’ Association) would be discussing in detail and come up with their suggestions to the government. I wouldn't want to be specific at this stage,” he said. “Banks should be empowered and constitutionally protected to conduct commercially prudent settlements.

The government also firmly believes that the NPA (non-performing assets) situation has risen on account of certain sectoral stresses. We must support the banks fully so that their ability to support growth remains.”

Minister of State for Finance Jayant Sinha said the government was “considering a stressed asset fund as well. That is something that the banks are also working on and we will certainly see what we can do in terms of solution to expedite the recovery process.”

There are expectations that the proposed National Investment and Infrastructure Fund (NIIF) could play a role in easing the situation. “Some kind of a partnership between banks and NIIF could be in the offing where the bad loans could be lobbed off,’’ said a banker.

The government is actively wooing sovereign wealth funds to invest in the NIIF which is proposed to be used to build roads, ports and utilities. State-controlled funds from Singapore, Abu Dhabi, Qatar, and Canada may be interested in investing the fund.