The finance ministry has asked government banks to shift to a system where non-performing assets (NPAs) are identified by technology. The aim is to avoid human interference. The ministry has told the government banks to put the system in place by March 2011.
“Since most banks are on the core banking solution (CBS) platform, the government is of the view that classifying NPAs using CBS should not be a problem for banks,” said the chairman and managing director of a mid-sized public sector bank, which has received the government’s letter.
The country’s largest lender, State Bank of India (SBI), and large banks like Union Bank of India, have told the ministry that they calculate NPAs on the CBS platform. While most government banks have achieved 100 per cent CBS, some, such as the Central Bank of India and Punjab & Sind Bank, are yet to move fully to CBS.
According to industry sources, the move is aimed at curbing the human hand in recognising NPAs, which delays identification of NPAs. “The government has noted that some chairmen of state-run banks understate NPAs when they approach retirement. The bad loans come to light once the new chairman takes over,” said the chairman of a government bank.
According to the Reserve Bank of India (RBI) norms, an asset, including a leased asset, becomes non performing when it ceases to generate income for the bank. Banks have to classify a loan as non-performing if interest and/or installment of principal remain due for more than 90 days.
RBI mandates 100 per cent provisioning for loss assets. For doubtful assets, 20 per cent provisioning is required, and if the asset is doubtful for one year, 30 per cent provisioning is required for three years. After more than three years, the loss has to be fully provided for.
An asset is classified as sub-standard if it remains non-performing for 12 months. An asset becomes doubtful if it remains sub-standard for 12 months. A loss asset is one whose loss has been identified by the bank or internal or external auditors or RBI but the amount has not been written off wholly.
According to RBI data, though net and gross NPA ratios of commercial banks have not increased significantly in 2009-10 as compared to the previous year, the NPA provisioning has seen a substantial increase.
Banks have increased their NPA provisions by 43 per cent in 2009-10, as compared to 28.4 per cent in the previous last year. The net NPA to net advances ratio rose only marginally to 1.1 per cent at the end of March 2009 from one per cent at the end of March 2008, while the gross NPA to gross advances ratio remained constant at 2.3 per cent.
In the first quarter of the current financial year, listed banks saw gross NPAs rise by Rs5,100 crore, with SBI alone seeing a fresh addition of1,300 crore.
It is very good idea to have system generated NPA without human intervention. There are two major points of concirn.
1. A good number of accounts are being hidden by all the Banks every year and there always remains a scope of negotiations with the Auditors before finalization. If NPA is generated streightway from the system then this tag-of-war will, no doubt, discontinue. But it is all the more tru that a huge number of accounts would come out as NPA which could be very difficult to sustain not only by the individual Banks but for the Govt. also from the point of view of Capital adequacy.
2. Methodology of an account becoming NPA should be rationalized first. A standard procedure for Demand satisfaction method should be formalized first. In the present system of incremental interest rate, actual EMI is ever increasing which leads to nature overdue of accounts.
It is a good move to make the classification of NPA is to be taken care of by systems without human intervention. The parameters set are to be carefully monitored by Statutory Auditors. At the same time minor deviations may be allowed and powers such reclassifications should rest with higher officials and not at branch level.