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RBI unlikely to buckle as pressure mounts to ease NPA norms

Kamal Sengupta in Bombay

The slowdown in the economic growth and the industrial downturn have started affecting the quality of assets of the Indian banks which have so far remained unscathed by the non performing assets problem plaguing the rest of the Asian banks.

While trade and industry bodies have been lobbying for the dilution of NPA norms in the face of 'recession', the Reserve Bank of India is unlikely to buckle under pressure. According to an RBI estimate, the total NPAs of the banking sector are around Rs 430 billion. In percentage terms, the NPAs of the banking sector were pegged at around nine per cent of total assets in March 1997. Since then, it might have come down marginally.

RBI Governor Bimal Jalan has hinted at tightening of NPA norms in the forthcoming credit policy. Going by the existing asset classification norms, banks are required to classify their assets (advances to various sectors as well as investments in government securities and corporates bonds and debentures) into four categories -- standard, substandard, doubtful and loss assets.

When a corporate fails to pay up the interest on the loan for two quarters (180 days), an asset turns into substandard. In two years, a substandard asset becomes doubtful and when recovery becomes impossible, the asset turns into a loss asset.

Banks are required to make 10 per cent provisioning on substandard assets. The quantum of provisioning goes up to 20 per cent for doubtful assets which is stepped up to 30 per cent and 40 per cent in phases (for the unsecured portion). For loss assets, banks are required to make 100 per cent provisioning.

International rating agency Thomson BankWatch has expressed concern over the alarming rise in the level of the NPAs of Indian banks. According to the rating agency, the level of the NPAs is far higher than that shown by the Reserve Bank of India.

TBW, headquartered in New York, is the largest rating agency for banks and financial institutions in the world. According to TBW officials, the actual level of the NPAs could be much higher than Rs 430 billion. "It is a fact that banks resort to 'window dressing' of their loan assets through restructuring and rescheduling to 'camouflage' their actual asset quality problems," a senior TBW official said.

Global rating agency Standard & Poor's has estimated the NPA level at a whopping 70 per cent of the total assets. The rating agency has pointed out that Indian asset classification norms remain lenient and if more stringent international norms were applied, banks' asset quality would only worsen.

According to a leading foreign institutional investor, the health of the industrial loans (54 per cent of total loans) is of primary concern, although some deterioration can also be expected in the trade-related and agricultural loans. Within industrial loans, the sectors most vulnerable to the downturn are: iron and steel (eight per cent of industrial loans), textiles (13 per cent), chemicals (11 per cent) and the newly set up private sector refineries.

The ongoing dismantling of the administered price mechanism may not leave these companies with sufficient margins to cover their high capital costs. The FII estimates that if five per cent of the current outstanding loans were to turn non-performing, the incremental provisioning and loss of interest income can shave-off up to 60 per cent of the projected net profits for the larger banks in fiscal 1999.

The FII has compiled a list of some of the well-known cases among India's top 200 corporates operating in the vulnerable sectors, where the chances of future default are high. These companies have a potential to default to the tune of Rs 108 billion of bank loans and Rs 273 billion of loans from the financial institutions. This is only about 3.7 per cent of the total outstanding bank loans but a fairly high 15.4 per cent of institutional loans.

Having listed the concerns, an important fact that cannot be overlooked is that the Indian banks have the lowest proportion of loan assets in their balance-sheets among all regional banks. Loans constitute only about 42 per cent of an Indian banks' balance-sheets compared to Hong Kong (62 per cent), the Philippines (55 pc), Singapore (61 pc), Malaysia (69 pc) and Thailand (78 pc).

As much as 45 per cent of Indian banks' assets are deployed in government bonds and deposits with the Reserve Bank of India in the form of cash reserve ratio. These are zero-risk assets. Other assets include money market instruments, fixed and miscellaneous assets, which carry very little risk. The very low level of loans in the total assets considerably lowers the risk profile and enhances the provisioning capabilities of banks.

Indian banks, already carrying the burden of NPAs accumulated in the past, are faced with the prospect of a further rise in NPAs. The current slowdown in the economic and industrial growth raises the possibility of a sharp deterioration in the health of banks' asset portfolio.

Corporate borrowers may push up NPAs of banks