NPA Crisis

RBI uses divergence to compel banks to improve their loan-loss ratios


From UPSC perspective, the following things are important :

Prelims level : NPA Divergence

Mains level : NPA Crisis

  • Few public sector banks that have reported earnings for the January-March quarter have mentioned ‘divergence’ in bad loan recognition and have made provisions for such loans.

What is NPA Divergence?

  • Divergence is the difference between central bank and RBI’s assessment and that reported by the lender.
  • Divergence takes place when the RBI finds that a lender has under-reported (or not reported at all) bad loans in a particular year and hence asks the lender to make disclosures if under-reporting is more than 10% of bad loans or the provisioning.
  • Higher provisioning for divergence was one of the reasons for them to report losses for the quarter.
  • Interestingly, divergence was identified not because these banks hadn’t classified the loan as non-performing assets (NPA) but because they were late in classifying them.

Classifying NPA’s

  • Since the date of classification as NPA had been pushed back, the banks had to make higher provisioning due to the ageing factor.
  • In the first stage of NPA, which is the ‘sub-standard’ category, 15-20% provision is required and for next category, which is ‘doubtful’, a 40% provision is required.
  • RBI has now made it mandatory that when one bank declares an account as NPAs, all other banks need to classify it as an NPA, so the sources of funds are blocked to the errant borrowers.
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