How lenders deal with the suspension of the Supreme Court’s recognition of bad debt

An interim Supreme Court instruction preventing banks from marking defaulted accounts as non-performing assets is still in place for a fourth consecutive month, forcing bankers to find solutions to deal with stray borrowers.

In an order dated September 3, the Supreme Court said accounts that had not been declared as NPA before August 31 could not be labeled as such until further notice. The directive had come into play during the hearing of the compound interest or interest on interest case. While the government has since announced a waiver of compound interest, the ban on recognition of the NPA persists.

Find go-arounds

Four senior bankers, who spoke on condition of anonymity, said that while an account cannot be labeled as NPA, lenders treat them as defaulters whenever possible.

Banks usually withhold any new loans in accounts marked as non-performing. According to a senior State Bank of India official, the lender does this in cases where repayments are over 90 days overdue, even though the account has not been officially identified as an NPA.

The SBI also initiates certain loan recovery measures, including dialogue with the borrower and collection notices. However, since the account is not an APN, the full suite of recovery options cannot be initiated. An NPA tag allows bankers to impose restrictions more rigorously, said the banker quoted above.

A second banker, civil servant in a public sector bank, said the working capital limits for 90-day overdue accounts are reduced, as would be the case with an account officially labeled as a NPA.

A third banker, at the head of another public sector bank, said that as softer recovery measures are launched, lenders need to be careful about the optics involved in foreclosing and recovering assets from banks. small borrowers. Since the impact of the pandemic is still in effect, bankers must be careful to avoid criticism of being too harsh on retail borrowers and small businesses, the banker said.

Accounting for non-NPA APMs

During the July-September quarter, most of the major banks reported gross NPA ratios with the Supreme Court’s interim order in mind. In addition, they also disclosed pro forma gross NPAs, which showed where the asset quality numbers would have been had the interim order not been in effect.

Dhananjay Sinha of Systematix Group said that based on pro forma NPA disclosures made by the big banks, there is a variation of about 100 to 120 basis points between the reported NPA and the actual NPA numbers.

“Besides a disruption in reporting asset quality figures, there will be an impact on banks recording interest income on standard accounts that should have been NPAs. There will be changes in the future growth of bank income once these accounts are classified as NPA, ”Sinha said.

Shriniwas Joshi, partner of the accounting firm CVK & Associates, agreed. Unless a defaulter is identified as an NPA, the interest accounting process continues, giving a distorted picture of the bank’s profits, Joshi said.

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