Banks may face RBI action if they mis-report NPA numbers

In certain cases, it's been noted that, loans that had already become NPAs were still treated as standard assets

The Reserve Bank of India (RBI) has said it will now begin to take action against banks that misreport the non-performing assets (NPAs) on their books. It had been observed that in certain cases, loans that had already become NPAs were still treated as standard assets.  

“We inspect the banks and we ferret out situations where something that is standard is not NPA and these are called divergences. And some banks there are more divergences that the other. In that case they have a pretty strong discussion with S S Mundra in which he hauls them over the coals for doing what they did. And increasingly we are turning towards taking actions against such divergences. So it is not that these things get done with impunity,” said Raghuram Rajan, governor, Reserve Bank of India.

According to the central bank’s norms, a bank has to classify the loan as NPA if the interest and/or principal are due for more than 90 days. The sub-standard assets which are the first level of NPAs attract 15 per cent provisioning compared with 0.4 per cent for standard assets.

Misreporting of NPA numbers recently came to light when public sector lender Bank of India wrote a letter to RBI stating that its auditors had not allowed the loan to Essar Steel to be treated as standard asset even though other lenders had done so. It is believed that the borrowers had paid the dues on the 92-93rd days and as a result most banks had not classified them as NPA.

“There are select cases when a certain bank will have more collateral outside a consortium therefore the pressure on a particular asset on a bank would be lesser than what the others are exposed to and these are the things that lead to divergence in reporting NPAs. However, these cases are rare,” said the chief financial officer of a bank.


  Another banker added that the cases of divergence in reporting NPAs also happen when RBI does the inspection of the books. “There are times when a bank may not think that an account needs to be downgraded so early but the regulator may differ and then banks after a discussion accordingly make the changes.”

Apart from ensuring that the numbers put out by the banks are correct, the regulator is also going to closely monitor the cases being refinanced under the 5/25 scheme by banks are using for the right purpose.

“The point is not to postpone problems into the future or to postpone repayments. In fact we are insisting that there shouldn’t be significant moratorium on repayment in the 5/25 rule. So we have to take a decision on whether this is forbearance which we don’t want to do or flexibility that may be warranted,” said Rajan.

Under the 5/25 scheme, banks can extend loan repayments for a period up to 25 years, with an option of refinancing the loan every five years.

Asset quality concerns, especially around public sector banks, continue to remain. According to the Financial Stability Report published by RBI, the gross NPA (GNPA) in the system has been increasing. According to the report, the GNPA in the system increased from 3.4 per cent in March 2013 to 4.6 per cent in March 2015. Even the overall stressed advances have inched up to 11.1 per cent in March 2015 from 9.2 per cent in March 2013.