Bad loans to double in 2 years as RBI tightens recast norms

MUMBAI: he Reserve Bank of India's efforts to clean up the banking system with higher provisioning for restructured loans could double the reported bad loans in the financial system and raise the demand for more capital. Punjab National Bank, Oriental Bank of Commerce and Indian Bank may be the worst hit with more than 10% of their total outstanding falling into the restructured category.

"The gross NPA percentage of the banking system is likely to shoot up with the implementation of the new guidelines," rating company Icra said. "Corresponding restructured advances, which have also been a source of vulnerability so far, are likely to come down, thereby limiting the incremental impact of the new asset classification on the credit profiles of banks."

A working group of the RBI has suggested raising the provision for restructured loans to 3.75% by March 2014 and to 5% by March 2015. It is 2.75% now. New incremental restructured loans would attract a provision of 5%, as restructured loans will fall into the sub-standard category from April 2015. Loan restructuring has been the biggest drag on the banking sector. Firms such as Suzlon, GTL and Bharti Shipyard are among companies that have restructured loans.