The Reserve Bank of India has started a review of the non-performing asset or bad loan classification norms to ease the flow of credit to corporate groups.

The move follows a reference from the government and is aimed at relaxing the norms temporarily to enable companies to access funds during the economic downturn that is putting pressure on cash flows and repayment capabilities.

The review has been sought by the finance ministry following appeals from various industries such as steel, textiles and gems and jewellery.

Current guidelines mandate that any loan that remains overdue for 90 days is classified an NPA. Many industry groups have demanded lengthening the non-payment period to 180 days.

Sources close to the development, however, said the central bank is internally opposed to the suggestion because relaxing bad loan classification norms would take the Indian banking system below the global benchmark.

Instead, the central bank is looking at the possibility of reworking the borrower classification norms. Under current guidelines, a bank considers the account of an entire business group as non-performing if any of the loans sanctioned to a group company turns an NPA. This affects the funds flow to group companies.

If the borrower classification norm is done away with, only the group company that has defaulted will be denied fresh loans.

Sources said, a final decision on the issue will be taken after banks declare their third quarter results.

RBI has already started a review of loans to steel, textile and aviation companies. Banks are already showing signs of increasing delinquency levels with gross non-performing assets of the listed banks rising 10 per cent or by Rs 4,755 crore for the quarter ending September 2008.

RBI has already eased NPA classification and treatment norms. For instance, it has allowed banks to restructure loans to real estate companies and treat them as ‘standard assets’. Similarly, a second restructuring has been permitted for most sectors without having to make additional provisions by classifying them as bad debt.

For derivative-related losses, RBI has already done away with the move to classify all group companies as defaulters if one of the companies does not meet its liability towards a bank.

Sources said that the relaxation will, however, make it even more crucial for banks to monitor the end-use of loans given to the group so that funds are not diverted.

More Under Finance

Posted Under

Category : Finance (3456)
Type : News (12552)
Tags : NPA (37) reserve bank of india (723)

Leave a Reply

Your email address will not be published. Required fields are marked *