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Is RBI's classification causing bank NPAs to bulge?

Banking stocks, especially public sector banks, have been on the decline since Friday, largely on fears of restructured loan accounts turning into non-performing assets (NPAs) and the bulge in NPAs over the previous quarter ending September, say bankers.

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Banking stocks, especially public sector banks, have been on the decline since Friday, largely on fears of restructured loan accounts turning into non-performing assets (NPAs) and the bulge in NPAs over the previous quarter ending September, say bankers.

The rising NPAs has been due to the manner in which accounts get classified and not due to banks creating new NPAs, said a government banker. "What is the basis on which accounts get classified, as NPAs and non-performing ones escaping under the classification of performing assets need to be probed," he added.

The Reserve Bank of India, while announcing its sixth bi-monthly policy on Tuesday, also raised a red flag over rising bank NPAs.

NPAs are estimated to be much higher than the average 3% of advances to around 5-7%. Advances by banks as of Jan 9 this year was Rs 63.91 lakh crore.

Speculators on the other hand tried pushing up the market on Tuesday pining hopes on a rate cut that most bankers did not anticipate after the recent January 15 repo cut of 25 basis points to 7.75%.

Critics have argued the RBI governor, Raghuram Rajan's point of view of not classifying an asset as non-performing if promoters were new or if there was a change in ownership citing it as nothing short of sweeping the dust under the carpet. "This is ridiculous as an NPA cannot be de-classified as performing by mere change of ownership," said a senior banker on condition of anonymity.

"It appears corporates are being favoured when government banks are still pondering over defining Vijay Mallya as a wilful defaulter," said another banker at a private bank.

The RBI statement read as follows: "New promoters/developers may require additional time to revive/complete the stalled projects. In order to facilitate change in ownership and revival, it has been decided to provide further flexibility by allowing a further extension of the DCCO (date of commencement of commercial operations) of such projects where a change of ownership takes place, without adversely affecting the asset classification of loans to such projects, subject to certain conditions."

Bankers argue that many banks have assets that are non-performing due to either project delays or wilful defaults. There have been large projects which are delayed due to regulatory issues, approvals, raw materials, policy paralysis and the second being that of wilful or sick accounts that need restructuring.

However, change of ownership being the reason to keep away an account from being classified as NPA goes beyond the understanding of bankers, as profits are nowhere in sight even though NPA levels in books will not reflect such accounts.

"The fact that PNB fell Tuesday by 8.32% to 175.85 does not imply that the bank has created new NPAs as much as pumping in more funds into dead assets," said an analyst. PNB was the highest loser on the Nifty on Tuesday as the Q3 result announcement said gross NPAs rose 6% against the 5.65% of the previous quarter.

Bank Nifty has been on the decline since Friday. From 20,528.60, the index has slid 1,145.65 points or 5.58% to close at 19,382.95 on Tuesday.

Among the other bank stocks that fell were Axis Bank (5.13% at Rs 585.65), Kotak Bank (3.85% at Rs 1300.30), HDFC (2.79% at Rs 1233.85) and SBI (2.55% at Rs 299.65).

Most analysts expect the markets to remain choppy till February 15 when corporate earnings season ends, and post that could mark the beginning of pre-budget rally. Bankers are of the view that once the infrastructure bottlenecks on mining and policy issues get resolved in the coming months, most bank NPAs would show signs of shrinkages, but not before the next two quarters!

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