Bank, Imf Ask Rbi To Tighten Npa Norms

International institutions like the World Bank and International Monetary Fund (IMF) have raised the issue of non-performing assets (NPAs) in the Indian financial sector with the Reserve Bank of India (RBI). Top central bank officials said the agencies have asked the RBI to tighten the sector's prudential norms, including those pertaining to asset classification, to bring them to international standards.

This, they said, would give a clearer status of the sector's asset quality, showing how they compared with the banking industry on an international platform. The concern with NPAs has assumed added significance with international development institutions, rating agencies and investors following the Asian economic crisis which revealed the eroded asset quality of the once fast-growing region's financial sector.

International rating agencies like Standard & Poors (S&P), expressed concern over the situation, saying it would not improve in the near term given a weakening operating environment for the corporate sector and the consequent effect on credit policy. Internationally, an asset is an NPA if there is a default in interest payment in one quarter, whereas in India, there has to be a default for two consecutive quarters. Officials, however, said the central bank could not tighten these norms in the present circumstances as the industrial slowdown had lengthened business turnover cycles and affected debt servicing by industry.

The central bank's annual report for 1997-98, showed the country's NPAs at Rs 40,000 crore at end March 1998. Net NPAs to net assets were down to 8.69 per cent compared to 9.18 per cent in 1996-97. But analysts attributed this to two reasons. Firstly, the fairly strong 15 per cent growth in advances, makes the figure appear better. Secondly, write-offs and provisions by banks towards loan loss, increased significantly.

Besides, a bulk of the NPAs had accrued during the pre-liberalisation era when social concerns took precedence over profitability, resulting in mass disbursements with little or no credit appraisals, and poor recovery practices. Recovery of these was unlikely.

Most of the NPAs were concentrated with the public sector banks, with the worse off ones showing net NPAs at around 20 per cent levels. But, the problem caught up with the newly set up private banks also last year owing to sluggish economic growth.