With just two months to go before the closure of the current financial year, public sector banks are seeing their bad debts balloon with the adoption of ‘system generated' method for calculating non-performing assets (NPA).
A trial run of the system generated NPA done by a public sector bank saw its bad loans expand by 50 per cent. Irrespective of the size of the banks, bad loans went up by 10 to 30 per cent with the adoption of the new system.
According to Reserve Bank of India, the total bad debts of public sector banks was about Rs 57,301 crore as on March 31, 2010, of which, close to 55 per cent came from priority sector lending such as agriculture, small and medium enterprises and others.
New formula
The Finance Ministry has expanded the ambit of bad loans by bringing in rigorous parameters that public sector banks would have to adhere by March 31, 2011.
Earlier, only if the interest was not paid by the borrower within 90 days, it was classified as a bad loan. When he fails to pay his first due in 30 days, the system would call it a Special Mention Account- I, and if he still is unable to pay after 60 days, it is a Special Account II — warning that the account could turn rancid. The central office would call the borrower and start following if the loan value exceeds Rs 10 crore.
Toxic loan
If a trader or a businessman had been availing himself of cash credit and has not submitted his stock statement on time, the system would flag it as a bad loan. In the case of infrastructure projects, if the deadline given by the borrower in the financial closure is not met, then this would be considered a toxic loan.
When the calculation of NPAs is done manually there is some leeway, some discretion in the hands of the bank official. The ‘system generated' method auto-tracks NPAs, removing any subjectivity.
A senior General Manager, who did not wanted to be named, said it is a way of ensuring banks to show the full extent of their bad loans as some banks do not so.
Suppose the ‘equated monthly instalments' paid by the borrower on his home loan increases with the change in interest rate, if the branch manager does not capture the increased EMI to be deducted from the account, the system would show it as an NPA.
‘Herculean task'
Another official said it is has become a ‘herculean task' as each account has to be fed with the required parameters. However the move is to encourage better monitoring of asset quality than make higher provisions for the advances which affect the profitability of the bank.
These are minor changes that arise of technicality; the biggest challenge is in agriculture advances, which are determined by external factors such as drought or floods, said Mr S. Raman, Chairman and Managing Director, Canara Bank.
Agriculture advances has been split as ‘long duration crop' and ‘short duration crop.' While paddy may be considered as a short duration crop banana may be considered as a long run crop. In which category a crop falls would be decided by each State-level bankers meeting. In case of long duration crop, allowance of two crop seasons are given, while for the short it is just one season.
“The move should be welcomed as it not only disciplines the banks but also the borrowers,” said Mr T. M. Bhasin, Chairman and Managing Director, Indian Bank. Indian Bank had implemented the auto tacking system even as early as June last, he said.
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