Two years ago, the Reserve Bank of India (RBI) under the then Governor, Raghuram Rajan, carried out the first-of-its-kind asset quality review to dig out the hidden stressed assets in the banking system. This was over and above the annual inspection/audit. To bankers' surprise, the RBI handed them a list of 150 accounts for 15 per cent provisioning - 2.5 per cent each for the next six quarters till March 2017. For many banks, these 150 accounts were standard assets (not NPAs) requiring provisioning of just 0.40 per cent. "The RBI's arbitrary move to insist on 15 per cent provisioning was the first subjective act," says an agitated banker. The RBI's income recognition norms clearly say that a standard asset becomes an NPA if interest and principal are outstanding for 90 days.
While the RBI move was more of a preventive exercise, the bankers grumbled, as higher provisioning hit their profitability. Around the same time, there was another sword hanging over banks' head, as Rajan talked about making the result of the RBI inspection public, especially the divergence in figures, if any, between the NPA reported by the bank and the figure found by the RBI inspectors. The RBI's inspection report always used to be confidential. In April this year, RBI Governor Urjit Patel asked banks to make disclosures only where the additional provisioning assessed by the RBI exceeds 15 per cent of the bank's net profit or additional gross NPAs identified by the RBI exceed 15 per cent reported incremental gross NPAs.
Here are some prudential norms that are part of the NPA guidelines that give rise to subjectivity
I) Norms are for minimum provisioning: The RBI has the power to direct banks to make higher provisioning for certain assets in case of any sign of stress. For example, the RBI has taken a view that banks should make higher provisioning for telecom. Some bankers say the RBI inspections are individual-driven.
II) Difference of opinion in collateral value: The RBI inspector can always take a different view on the value of the collateral or recoverability of a certain stressed asset because of stress in the sector or the economy. As per the RBI, in cases where the erosion in collateral value is by over half, the bank will have to put the assets straight into the doubtful category.
III) High Value Account: Strangely, RBI income recognition guidelines talk about setting up strong systems and processes for timely identification of high-value accounts as NPAs. The power to decide what constitutes a high-value account is with banks.
IV) Funding interest from other credits and facilities: There are instances where the borrower gets additional facility or relief somewhere that helps him make interest or principal payment just before the 90-day period to regularise the account. In such instances, the RBI inspector takes a clear view of under-reporting of NPAs.
V) Regularisation near balance-sheet date: There are times when a few solitary credits are made in the stressed account closer to the balance-sheet date with promise of the rest coming later. The RBI is clear that such deals be handled with care and without subjectivity.
Whatever be the reasons, bankers say the decision to classify a genuine asset as an NPA has implications for corporates, banks and the economy. And if the RBI really believes there are lapses at the bank's end or the auditors end, it should fix responsibility to create a strong deterrent.