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Implications of the Narasimhan Committee recommendations

The Narasimhan Committee, as part of the second phase of the banking sector reforms, has recommended a tightening of the asset classification and provisioning norms with an objective of moving towards the international norms. It has recommended that an asset should be classified as doubtful when the borrowers fail to clear the interest payment in one quarter (90 days) instead of the current practice of two quarters (180 days) and government guaranteed advances, which have turned sticky, should be treated as NPAs.

Tightening of these norms will force banks to make additional provisioning. However, an internal State Bank of India estimate says the impact of the tightening of the NPA norms on its balance-sheet will be only one percentage point increase in NPAs. SBI's current NPA level is pegged at about six per cent. SBI along with the Calcutta-based Allahabad Bank has for the first time made the provisioning (.25 percentage points) for their standard assets in fiscal 1998.

One significant point to note is that the banking industry traditionally shows underestimation of NPAs as there is always a difference in perception between the auditors and the RBI inspectors. For instance, in fiscal 1997, the industry underestimated its NPAs to Rs 38.62 billion and underprovided to the extent of Rs 14.12 billion.

The Board for Financial Supervision of the RBI has cited the following reasons for the lower recognition of NPAs and subsequent under-provisioning:

1. Failure to identity an NPA in terms of stipulated guidelines: There have been instances of 'substandard' assets being classified as 'standard';

2. wrong classification of an NPA: classifying a 'loss asset' as 'doubtful' or 'substandard' asset; classifying a 'doubtful' asset as a 'substandard' asset.

The BFS has also detected instances where a bank has classified an account of a borrower as 'substandard' and other accounts of the same borrower as 'standard', throwing prudential norms to the winds.

"Essentially arising from the wrong classification of NPAs, there was a variation in the level of loan loss provisioning actually held by the bank and the level required to be made as per the assessment of the RBI inspectors," the internal document said.

The worst "offender" is the public sector banking industry. Nineteen nationalised banks along with State Bank of India and its seven associate banks have underestimated their NPAs by Rs 30.29 billion. While the RBI estimates the PSU banks' NPAs at Rs 469.07 billion, the actual NPAs acknowledged by these banks are much lower at Rs 438.77 billion. The difference between the RBI estimates and actual provisioning in PSU banks is pegged at Rs 10.74 billion in March 1997.

In percentage terms, however, nine new generation private sector banks showed the maximum amount of ''NPA amouflaging" and underprovisioning. While the RBI estimated the NPAs of new private banks at Rs 3.28 billion, the actual figure shown by these banks is only Rs 2.05 billion.

Similarly, the difference between the RBI estimate and the actual provisioning is Rs 968.5 million. While the RBI inspection teams put the right provisioning requirement at Rs 1.20 billion, the new private banks made provision of only Rs 234.5 million.

In contrast, the old private sector banks underestimate their NPAs by a meagre Rs 6.52 billion. Nearly 26 old private sector banks registered NPAs to the tune of Rs 21.38 billion in March 1997 while the RBI felt the actual NPAs should have been pegged at Rs 27.90 billion.

The difference between the RBI estimates and actual provisioning is a paltry Rs 1.61 billion. Old private sector banks provided for Rs 4.93 billion in March 1996 while the RBI inspection teams opined the provisioning needed to be at Rs 6.55 billion.

As a group, 37 foreign banks underestimated their NPAs by Rs 875.5 million and provisioning by Rs 797.6 million. The RBI estimated NPAs of foreign banks at Rs 13.55 billion while the actual NPAs shown by these banks were to the tune of Rs 12.68 billion. Similarly, foreign banks provided for Rs 4.02 billion while the RBI inspection teams estimated the right amount of provisioning at Rs 4.82 billion.

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