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P. Devarajan

THE RBI has put in place an early alert system and special mention accounts for banks to battle growing NPAs. Gross NPAs of 27 public sector banks as of March 31, 2002 are put at Rs 56,506.7 crore, of which NPAs of the non-priority sector come to Rs 30,251.15 crore.

An early alert system should capture the first signs of any disease affecting an account and will be part of the risk management model adopted by banks.

An RBI notice says, "Banks could designate a time-limit for overdue accounts to determine the threshold for a proactive intervention — well before the account becomes an NPA. This is to enable a bank to assess whether the default is due to some inherent weaknesses or due to a temporary liquidity or cash flow problem and accordingly calibrate its response. For example, where there is a default in an account for 30 days, it may be shifted to a special category."

An account may be regular but could be classified as potential NPA with atmospheric changes. The RBI has spelt them out: delay in submission of stock/financial/other control statements; return of cheques issued by borrowers; devolvement of deferred payment guarantee instalments and non-payment within a reasonable period; frequent devolvement of LC and non-payment within a reasonable period; frequent invocation of bank guarantees and non-payment within a reasonable period of time; return of bills/cheques discounted; non-payment of bills discounted or under collection; poor financial performance in terms of declining sales and profits, cash losses, net losses, erosion of networth etc; incomplete documentation relating to creation/registration of charge/mortgage; non-compliance of terms and conditions of sanction.

Banks have been told to introduce a new asset category falling between standard and sub-standard for internal monitoring and this is in line with the international practice of "special mention assets''.

A significant concession (for the time being) granted by RBI is special mention assets will not require provisioning as "they are not classified as NPAs." Nor are these proposed to be brought under regulatory oversight and prudential reporting. However, the RBI could consider, "in due course, income recognition and asset classification (IRAC) norms.''

No bank has a scheme for the management to catch any slip; most of the time catches get dropped at slips. At present, bankers adopt a rough and ready method to keep a tab on souring accounts and RBI would like to put some science into the effort. In the future, an account has to be placed against economic performance, internally and overseas. Perhaps, the nub of the problem lies in speedy response as most of the time a total choke on funds hastens death.

The RBI says: "The longer the delay in response (in fact, sometimes branch officials may have to act suo motu), the greater the injury to the account and the asset.

Further, the response decided on the basis of techno-economic study and promoter's commitment, has to be adequate in terms of extent of additional funding, relaxations etc, under the restructuring exercise. The package of assistance may be flexible, and where required, the bank may also look at the exit option.''

All of it can work if the corporate world displays even a modicum of integrity.

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