RBI tightens banks’ NPA norms on state-backed exposures

The Reserve Bank of India (RBI) has delinked the requirement of invocation of state government guarantee for deciding the asset classificati...

The Reserve Bank of India (RBI) has delinked the requirement of invocation of state government guarantee for deciding the asset classification and provisioning requirements. It has also revised norms in respect of the banks’ exposures to loans and advances, and investments, which are backed by state guarantee.

At present, asset classification and provisioning requirements in respect of state guaranteed exposures are linked to invocation of the state’s guarantee. In a single fell swoop, the revised norms will put to test the the states’ ability in servicing such debt. This will also be tougher for lenders. The idea is to insulate the banking system from the risks associated in taking up such exposures.

As per revised norms, for the year ending March 31, 2005, a state guaranteed advance shall be classified as ‘substandard’ or ‘doubtful’ or ‘loss’, if interest and/or principal or any other amount due to the bank remains overdue for more than 180 days and attract appropriate provisioning norms. While, with effect from the year ending March 31, 2006, it would be given such a classification if any amount due to the bank remains overdue for more than 90 days. The same asset classification norms will be valid for banks’ investments in state guaranteed papers, which are in the nature of ‘deemed advance’. Investment in state-backed papers of government undertakings will attract risk weight of 2.5 per cent for market risk.