Fair Request, Bad Loans and Provisions

Fair request, Bad loans and Provisions


Banks’ request to RBI for extending the application of higher provisioning norms in the present circumstances where the credit off take has not picked up, earnings other than interest are marginal, inter mediation cost is high forcing them to continue to charge higher rates of interest on existing loans, recoveries of loans proving difficult due to recessionary conditions etc appears genuine and needs favorable consideration.

However, the solution in respect of continued persistence of non-performing loans in banking books which cannot be eradicated as long as banks deal in money ,with people and the economy the growth of which itself is dependent on variable factors like fast changing political situation, volatile economic environment, social changes and technological advancements. It is high time the banks and the authorities recognize the festering nature of the problem of non performing loans and their impact on banks balance sheets, the economy in general and the financial system in particular and come out with a practical and permanent solution to contain formation of non performing loans to ensure a strong balance sheet for banks and at the same time minimize the adverse impact of such loans on other stake holders of banks. High bad loans, high interest rates,high provisions towards bad loans,high inter mediation costs, generally affect the credit expansion and banks develop a tendency to resort to lazy banking keeping the borrowers at a distance. To encourage lending liberally and attracting the borrowers in large numbers to banking fold,the problem of non performing loans has to be tackled differently and in a manner acceptable to both banks and borrowers alike. Other stake holders also should welcome the approach of banks in minimising the impact of npls in banks' books.

The only workable way to save the banks,all stake holders including the economy from this vexatious issue of non-performing loans is to bind the borrowers with an obligation to bear the burden of non performing loans. Banks also will have to share the burden to some extent basically to involve themselves and be more vigilant in the over all administration of credit portfolio. The suggested approach is creation of a fund named “Precautionary Margin Reserve” by levying a small percentage ranging between 0.10 percent and 0.75 percent on standard advances of the bank based on certain criterion of the quality of conduct of borrowers’ accounts. The Levy should be in the nature of a guarantee fee from all borrowers and should be maintained with banks themselves . Instead of compelling banks to increase the provisions , they can be asked to contribute a small amount towards this precautionary margin Reserve. The Fund over a period will be more than the bad loans formation and the coverage ratio will be much better than the present loan provisions coverage ratio. In terms quality of advances, profitability of banks, strength of balance sheets of banks, benefits derived to all stakeholders including the Government the suggested levy will prove to be a boon and win-win situation. The Fund also can be treated as tier-2 capital thus helping the banks to have better capital adequacy ratio.



Dr T.V.Gopalakrishnan