The Indian banks' total net level of non-performing loans could be double their reported level, even though asset quality has improved over the years, according to a report by Fitch Ratings India Ltd.
"Fitch believes the effective NPLs of Indian banks are understated," the rating agency said in a report made available to Reuters on Thursday.
Gross non-performing loans were estimated at around Rs 70,000 crore (Rs 700 billion) at end-March 2002, or around seven per cent of the industry's total loans, according to central bank data.
Bankers estimated net bad loans, after adjusting for provisions and loan insurance cover, at around half that amount.
But the Indian classification standards for NPLs are currently less stringent than international standards, and a shift to global standards could raise NPL levels by as much as three per cent of total loans and advances, Fitch said.
Until the last fiscal year ended March, Indian banks were required to classify a loan as NPL if interest was not recovered for 180 days or more. This is half the global norm of 90 days.
They will adopt the international standard from the current financial year.
Enron loans
Loans to problem accounts that have been restructured, including those to the steel sector and to the Enron-sponsored Dabhol power project in Maharashtra, continue to be classified as standard, Fitch said.
It estimated these could total another three per cent of bank loans in the country.
"The effective net NPL level of Indian banks could thus be double the reported figure," Fitch said.
However, the key issues are being addressed and are unlikely to affect banks' balance sheets at one go, it added.
Stricter credit evaluation and sanction norms, an increased focus on loan recovery, and higher loan loss coverage, backed by record profits from trading in gilts in a soft interest rate regime, have helped Indian banks improve their reported asset quality ratios over the past four years, the rating agency said.
In addition, net NPLs could come down by as much as two per cent of total loans if a government proposal to buy back illiquid, high-coupon government bonds from banks were to go ahead, Fitch said.
The proposal, outlined in the current year's Union Budget, aims to exempt gains from such buybacks from tax if they are used to write off NPLs.
Net NPLs could also come down by up to one per cent of total loans over the next 18 months as asset reconstruction companies become operational, Fitch said.
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