The Hindu Business Line : Higher provisioning for NPAs under 90-day norm

Till the last fiscal, prudential guidelines prescribed that assets be classified as performing or non-performing assets (NPAs) on the basis of the 180-day norm. That is, loans with overdue payments beyond this deadline could be treated as NPAs.

However, with effect from this financial year, the guidelines have been revised and a 90-day norm has been applied. Bankers said that with the application of these loans, the provisions for bad loans have increased proportionately.

But bankers' real worry is the status of State government-guaranteed securities. The Reserve Bank of India (RBI), in its January 20 notification, indicated that provisioning also includes State government-guaranteed borrowings. Such borrowings include resources raised through privately/publicly placed bond issues. The problems of bankers are mainly related to bonds issued on the support of sub-sovereign guarantees. Bankers said that barring a couple of State government-owned public sector undertakings, most had large overdues to the bondholders, especially the banks.

Few of the banks have made provisions for such securities the last few years. This is because under the original guidelines, provisions were required only on State government securities where guarantees had been invoked. Several banks, in turn, understated their provisions ( while some of the more prudent bankers created floating provisions), since the guarantees were never invoked.

The revised guidelines specify that the provisions would have to be made from March 2006 wherever the debt service payments areoverdue, irrespective of whether or not the guarantees are invoked. As a result, bankers said that their provisioning liabilities arelikely to show large increases from the next fiscal on.

The bankers said that despite the escalation in the provisioning requirements, the tax exemption under Section 36 (I, vii-a) of the Income-Tax Act would not be available from the next assessment year. Under the clause (introduced in 2002), bankers are allowed an income-tax deduction of up to 10 per cent on their provisions for NPAs. The clause is close-ended and due to expire on March 31 , implying that it would be available only for the assessment year 2004-05.

The outstanding State government guarantees are estimated at Rs 1,85,000 crore, according to the RBI's Survey of State government finances. Most bondholders are banks, general insurance companies and provident funds. The guarantees cover both principal and interest dues of the States to the bondholders.

This year most banks face large tax liabilities on account of loan recoveries, which would comprise a part of the profit and loss account.

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