Call To Revoke New Farm Sector Npa Regulations

The Indian Banks Association has requested the Reserve Bank of India to revoke its new norms for classification of non-performing assets (NPA) in the agricultural sector.

Banking sources said adopting the central banks new norms could seriously undermine the bottomlines of virtually all banks, including the existing profit-making ones. Re-classification of agricultural NPAs would also lead to several banks falling short of their capital adequacy ratio, they added.

All banks are required to meet their capital adequacy ratio norms by the end of this month.

A fortnight ago, the Reserve Bank had issued a circular to all banks, which described the altered norms for classification of NPAs in the agricultural sector. According to the circular, credit to the agricultural sector would henceforth be classified as non-performing if there were overdues for more than two quarters, as opposed to the current two seasons.

The sources said this kind of a classification was unrealistic given the current farming seasons and farmers receipts profile, which are usually at the end of the kharif or the rabi season.

They added that such a method of provisioning would imply that the entire priority sector credit to the agricultural sector would have to be provisioned, given the seasonality of repayments by farmers.

This could adversely affect any equity issues by banks for increasing their capital base, the sources pointed out. Higher provisioning leads to lower net profits, and consequently a low earnings ratio.

We have made the Reserve Bank understand that this kind of provisioning is not possible under the current environment and hope to have the directive rescinded soon, the sources added.

Under the existing guidelines on NPAs, banks are required to classify assets as either sub-standard, bad and doubtful, or loss assets. Overdues for two quarters would imply that agricultural credit would have to be provisioned on the basis of sub-standard assets, the sources explained.