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RBI calls for bad-loan purge

Mumbai, Nov. 15 (PTI): Prompt remedial actions are required to reduce the net non-performing assets (NPAs) of commercial banks. Despite a decline witnessed over the past several years, they are still on a higher side compared with standards of around 2 per cent in developed countries.

The cumulative provisions against loan losses of public sector banks (PSBs) in India amounted to 42.5 per cent of their gross NPAs for the year ended March, 31, 2002, the Reserve Bank of India said in its “report on trend and progress of banking in India 2001-02” released today.

“This is low compared with international standards, where provisions against impaired assets are often as high as 140 per cent. There is, therefore, a need for banks to improve their provisioning practices. Full provisioning towards already impaired assets needs to be a priority corporate goal,” the apex bank added.

The banks should have multi-pronged approach to tackle NPA, necessitating varied strategies suited to different stages of the passage of credit facility. Close monitoring of the account, particularly the larger ones, is of prime importance, it said.

“Emerging weakness in profitability and liquidity of corporate, recessionary trends, recovery of instalments/interest with time lag should alert and caution the banks,” it said.

The loan review mechanism needs to be adopted as a tool to bring about improvements in credit administration, it added.

RBI said banks should also adopt their own risk-rating systems to assess the risk of lending. Sanctions above certain limits should be through a committee which can assume the status of an “approved grid”.

Exchange of credit information among banks would be of immense help to avoid possible NPAs. The banking system ought to be so geared that a defaulter at one place is recognised as a defaulter by the system, it said.

The system would have to provide a mechanism to ensure that the unscrupulous borrowers are unable to play one bank against the other, it said. In this context the facility of credit information bureau becomes relevant, it added.

RBI said from a policy perspective, it becomes imperative that a reduction in NPAs would require both — ‘stock’ (a one time cleansing of balance sheet) and ‘flow’ (preventing substantial accretion) solution.

On the legal framework, the report said delays owing to inefficiencies or bottlenecks in the legal system can seriously jeopardise the debtor-creditor relationship and adversely impinge upon the smooth functioning of the financial system.

It was, therefore, important that the judicial system displays an understanding of financial transactions for banks to rely on fair and speedy enforcement of their contractual rights and obligations, the apex bank said.

Major legal reforms have been initiated in the banking sector pertaining to security laws, frauds and regulatory framework, it added.

RBI said the gross NPAs of scheduled commercial banks (SCBs) rose by 11.23 per cent at Rs 70,904 crore as on March 31, 2002 compared with Rs 63,741 crore in the previous fiscal. The gross NPAs for last fiscal includes Rs 4,512 crore on account of merger of ICICI with ICICI Bank.

Net NPAS in the same period increased by 9.5 per cent to Rs 35,546 crore from Rs 32,461 crore as at March end 2001.

There was a perceptible decline in the ratio of gross NPAS and net NPAS, measured as percentage to advances as well as assets, the report said.

The report said NPAs of public sector banks increased marginally during the year in spite of substantial recoveries, whereas for foreign banks, recoveries exceeded accretions to NPAs.

New private banks, however, had substantial addition to their NPAs, reflecting the impact of merger during the year.

The gross NPAs of new private sector banks witnessed a substantial increase from Rs 1,617 crore as at March end 2001 to Rs 6,822 crore a year later.

As at March-end 2002, out of 22 old private sector banks, 17 had net NPA to net advance ratio up to 10 per cent, whereas it was in excess of 10 per cent for five entities.

The report said out of 40 foreign banks operating in the country, 26 banks had net NPAs to net advances ratio within 10 per cent and for as many as nine banks, this was in excess of 20 per cent.

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