RBI revises asset classification norms for infrastructure firms

MUMBAI: The Reserve Bank of India has thrown a lifeline at banks which could help lenders report lesser bad loans. It has scrapped the condition that a loan could be treated as standard loan if it is restructured only once. The regulator has allowed banks to restructure loans many times within the stipulated period of commissioning of projects — which varies from two to four years. The delay in commissioning could range from litigation to other obstacles and banks can still treat those loans as standard ones.

“Banks may restructure such loans, subject to the extant prudential norms on restructuring of advances, by way of revision of DCCO or date of commencement of commercial operations beyond the time limits,’’ prescribed, the central bank said in a notification. Banks can “retain the ‘standard’ asset classification, if the fresh DCCO is fixed’’ if the account is serviced as per “restructured terms.” Indian banks are reeling under one of highest levels of bad loans in a decade as the previous government’s indecision and corruption charges held up projects. Land disputes and lack of fuel led the many road and power projects incomplete.

This led to defaults, and in many cases the loans were restructured to avoid bankruptcy. Earlier, banks were allowed to classify any loan restructured for the second time as bad loan. Now, a loan could be restructured, for instance an infrastructure loan stuck due to litigation, many times within four years of commission date.

“It will go a long way in encouraging project finance and infrastructure projects,’’ said M Narendra, chairman and managing director, Indian Overseas Bank. “Banks having such exceptional cases will be impacted positively.” The level of gross non-performing advances as percentage of total gross advances for the entire banking system declined to 4% in March 2014, from 4.2% in September 2013.

The net non-performing advances, as a percentage of total net advances, also declined to 2.2% in March 2014, from 2.3% in September 2013. Although, bad loans have eased, the central bank cautioned that the stress levels are still high. “India’s financial system remains stable, even though the banking sector, particularly the PSBs, is facing some major challenges,’’ RBI said in a report on the financial sector stability.

“The results of the latest systemic risk survey conducted by the Reserve Bank in April 2014 show that the banks’ asset quality still remains under the ‘high’ risk category.’’ Standard assets mean performing assets. In anticipation of a future default, a standard loan account can always be referred for recast. Earlier, the central bank mandated that the standard loan accounts could not retain their standard status after restructuring effective from April 1, 2015.