RBI may put cap on NPAs at 5% of advances

PSU banks with over 5% bad loans may have to sell their loans to asset restructuring companies (ARCs) in future. The Reserve Bank of India (RBI) and the ministry of finance are considering the option of putting a cap at the maximum amount of bad loans that a bank can have on its books.

The finance ministry as well as the central bank are appalled at the rising level of bad debts of the PSU banks. According to latest figures, the 26 PSU banks of the country have close to 5% NPAs on their books. If the amount of restructured loan is also taken into account, then the figure touches 10%.

"We have asked the banks to focus on recovery of their loans in the next two quarters. However to avoid such a situation in future we have to have strict rules. Any bank with above 5% of NPAs is in the danger zone, and we want to avoid such a situation," said a source in the ministry of finance.

PSU banks are reluctant to sell off their bad loans to asset restructuring companies. This is one of the prime reasons why the Indian PSU banking sector is highly leveraged.

In January this year, the RBI issued new guidelines which incentivised banks to recognize and dispose off NPAs early. RBI has proposed liberal framework for assets sale and has allowed non-banking finance companies and private equity firms to participate in the auction process.

United Bank of India has the highest amount of bad loans at 10.82%. The bank reported a record Rs 1,238.08 crore loss in the December quarter. Due to such high NPAs, the bank was forced to stop giving fresh loans exceeding Rs 10 crore to an account.

The situation is equally bad for Central Bank of India which has NPAs at 6.48%, followed by India's largest bank, State Bank of India, which reported its NPAs at 5.73% in the December quarter of the current fiscal year.

Gross NPAs of listed banks have risen in the last two years as many corporate houses including, Kingfisher Airlines defaulted on their loan payments. NPAs or bad loans of banks were reported at Rs.1.32 trillion at the end of the March 2012 quarter and they swelled to Rs.1.79 trillion by December 2012, and to Rs.2.43 trillion at the end of the December 2013.