[sbinews] Banker-borrower relationship - Why the 90-day norm is important (Businessline)

  • From: "Rajendra S. Pai" <rspai9@xxxxxxxxx>
  • To: sbinews@xxxxxxxxxxxxx
  • Date: Mon, 12 Apr 2004 20:17:41 -0700 (PDT)

Banker-borrower relationship - Why the 90-day norm is
Dharmalingam Venugopal

"A DEBT not asked is lost," is a universal saying.
Banks ought to know it
better than the others. But that was not the case with
Indian public sector
banks (PSBs) in the first two decades of

Debt collection was hardly one of their virtues and
the laxity in the
prevalent accounting practices only added to the
indifference. Banks could
account for their dues whether actually paid or not.
With the result, dud
loans or bad debts kept piling up year after year till
they became a the
mountain they are today. An estimated one lakh crore
of rupees are locked up
as bad debts in the banking system.

All that has been changing in the wake of the
financial reforms being
carried out since the beginning of 1990s. Debt
collection has become as
important as loan giving for the PSBs. And the new
prudential norms allow
banks to account for outstanding dues only when they
are collected. Credit
sanction, monitoring and debt recovery have become a
seamless process.

Even before the instalments are due the banks send a
friendly intimation
informing the borrower about it. If the dues are not
paid in time, a polite
notice is sent followed by registered notices every
month. If the dues
remain unpaid for more than six month, banks declare
such loans
"non-performing assets" (NPAs) and promptly set in
motion a process to
recover their dues.

A stern lawyer's notice is served first, followed by
an offer for an
out-of-court settlement. If that fails, the defaulters
are taken to the fast
track Debt Recovery Tribunals or Lok Adalats and if,
even then, they fail to
cooperate, the banks do not hesitate to take over the
properties given as
security for the loans and auction them to realise
their dues under the

Impaired loans
All these developments notwithstanding, it would be
unrealistic to seek to
bring about a marked improvement in the recovery or
repayment culture of the
PSBs and their borrowers overnight. It was for this
reason that the RBI
sought to bring down the loan impairment time - that
is, the period of
default before an account is declared non-performing -
in a gradual manner.
The default period was specified as 12 months from
March 1993 and was
reduced to nine since 1994. From 1995 onwards it was
cut to six months. The
grace period of one month allowed earlier before a due
was treated as
overdue or "past due" was also removed.Now, with a
view to bring down the
default period closer to international best practices,
it is being further
reduced to three months from March 31. Thus, from
April this year, all bank
dues pending for more than 90 days will be declared
bad or non-performing
and appropriate action will follow to recover the
dues. Agricultural loans
and export credit are, of course, exempted as their
recovery is governed by
separate norms.

Best practice
What is the international best practice in classifying
a bad loan? "Even a
cursory review of classifications system reveals the
absence of
international consensus on loan classifications
approach," admits a World
Bank survey of Bank Loan Classifications and
Provisioning Practices in
Selected Developed and Emerging Countries and
explains, "In some countries
non-performing means the loan is impaired. In other
countries, it means that
payments are past due, but there are significant
differences among countries
as to how many days a payment should be in arrears
before past due status is

The survey concludes: "Nevertheless, a rather common
feature of
non-performing loans appears to be that a payment is
`more than 90 days'
past due."

Expanding on the rationale behind a time limit on bad
loans, the survey
report continues, "Most of today's classification
regulations were enacted
in the past 10 years, reflecting a growing awareness
among banking
supervisors of the importance of a classification
system as the foundation
for proper loan provisioning... Taken as a whole,
these recent developments
signal a growing awareness of the need to upgrade such
regulations, in line
with international best practices, in order to reduce
the likelihood that
inadequate loan classifications and provisioning may
result in bank

Ninety-day norm
In preparation for the implementation of the 90-day
norm, Indian banks have
already been directed to shift, since April 2002, to a
system of charging of
interest on a monthly basis instead of the current
practice of charging
interest on quarterly basis.

Interest has to be calculated on a monthly basis under
the new system
because borrowers are required to pay the interest for
every month before
the 10th day of the subsequent month or, in any case,
before the next
payment of interest is due. Failure to service
interest every month will
attract penal interest besides recall of the loan
after three months.

There has been a general fear among the bankers that
their NPA levels will
shoot up significantly once the 90-day norm is

According to estimates, net NPA levels are likely to
go up by 10 per cent in
the next year. In some banks it could be higher. This
is an obvious down
side to the reform. Mindful of this, the RBI had
directed the banks to set
aside separate provisions for the change over to the
90-day norm from March

A more fundamental question that may arise in this
context is "why impose
international norms like this on an economy like India
which is mostly
unorganised, where even billing, the most basic
requirement of commerce,
remains largely optional?"

Prolonged delay in receivables has been a perennial
complaint of the
unorganised sector, particularly the small scale
units. The critics might
point to the experience of the Value added tax which
everyone agrees is
progressive but no one is prepared to implement.

The bankers too are likely to be, by and large,
resentful of the change as
it will undoubtedly entail an enormous amount of
additional work; that too,
at a time when most banks are managing with a depleted
staff strength
following the VRS option given to the banks.

These fears and drawbacks may be more than off set by
the up side to the
proposed change. Introduction of the 90-day norm is
part of the ongoing
banking reforms aimed at ushering in an efficient,
business and customer
friendly banking system which can conform to
international standards.

Only an efficient and globally competitive banking
system can offer timely
and adequate credit at reasonable price to all classes
of borrowers. Any
banking reform has to be seen in this light.

The 90-day norm will make the banks follow up on every
loan from the very
first month after disbursement.

This can greatly help the banks to detect signs of
sickness in time and
start the recovery process before the default swells
up or the assets
financed by the loans deteriorate in value.

Seen from the borrowers angle, the new norm can impart
them a much needed
credit discipline to manage their finances properly.

It will curb the tendency among borrowers to keep
postponing repayment of
bank dues as the interest rates are below the bazaar
rates. It is the
experience of bankers that this mistaken notion has
landed many a borrower
in deep trouble.

Eventually the new norm can lead to a comfortable
90-day cycle of payment in
the organised sector, which can meet the needs of
liquidity and business
growth in a competitive economy.

Banks have a key role to play here in educating the
various sections of the
borrowers on the banking reforms, in general, and the
90-day norm in
particular. This can lead to a healthy banker-borrower

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