BIS proposes uniform definition of non-performing assets

At a time when Indian banks are battling the bad loan menace, global banking regulators' body BIS has proposed a uniform definition for non-performing assets and forbearance to ensure consistency in disclosures.

The Bank for International Settlements' (BIS) proposal also assumes significance amid efforts from Indian banks and other authorities to recover loans from wilful defaulters, including the beleaguered businessman Vijay Mallya.

The Basel Committee on Banking Supervision's guidelines for definition of 'non-performing exposures' and 'forbearance' seek to harmonise quantitative and qualitative criteria used for credit categorisation. Noting that there are no "consistent international standards for categorising problem loans", BIS said banks categorise bad loans in a variety of ways.

Reserve Bank of India Governor Raghuram Rajan is the Vice-Chairman of BIS, which has 60 central banks as members.

Rajan was elected to the post in 2015 for three years.

Set up way back in May 1930, BIS is the world's oldest international financial organisation, as per its website.

Coming out with the detailed consultative paper, BIS said the definitions are aimed at promoting "harmonisation in the measurement and application of two important measures of asset quality and thereby, foster consistency in supervisory reporting and disclosures by banks".

The document is titled 'Prudential treatment of problem assets -- definitions of non-performing exposures and forbearance'.

The Switzerland-based BIS said definition of non-performing exposures introduces criteria for categorising loans and debt securities that are centred around delinquency status (90 days past due) or the unlikeliness of repayment.

Besides, it seeks to clarify the consideration of collateral in categorising assets as non-performing, apart from mooting clear rules with respect to upgrading of an exposure from 'non-performing' to 'performing' asset.

Meanwhile, forbearance refers to concessions like modification or refinancing of loans and debt securities that are granted as a result of a borrower's financial difficulty.

The proposed definition sets out the criteria on when an exposure would cease to be identified as forborne and also takes into account the soundness of the borrower concerned.

In India, the bad loan woes have been mounting in recent years. The country's scheduled commercial banks, including public sector ones, have stressed assets, a combination of gross NPA and restructured loans, of about Rs 8 lakh crore.

This is about 11% of loan book size of around Rs 69 lakh crore of the entire system. 

Striking a note of caution, BIS said banks should not use forbearance practices to avoid classifying loans as non-performing.

"Categorising loans as performing or as less risky by extending forbearance is a source of divergence. Therefore, the definition prohibits the upgrading of a non-performing exposure by granting forbearance measures and requires a separate categorisation for forborne exposures," it said.

BIS also noted that proposed definitions complement the existing accounting and regulatory framework in relation to asset categorisation.

"They are intended to be used, for example, in the supervisory monitoring of a bank's asset quality as well as by banks in their credit risk management and as part of their internal credit categorisation systems," it added.

The global financial crisis revealed difficulties for supervisors and other stakeholders in identifying and comparing banks' information across jurisdictions.

In response, the Basel Committee on Banking Supervision set up a dedicated task force to analyse jurisdictions' and banks' practices regarding asset categorisation schemes as well as consequences of any differences in practices.

The proposed guidelines have been prepared by the committee after an extensive analysis of practices in various jurisdictions.
Comments on the guidelines have been sought till July 15.