New provisioning rule too harsh to handle for bank loan defaulters

According to a new rule which is still to be announced, Indian banks could suffer if one of their corporate borrowers is blacklisted as 'non-performing asset' (NPA) by another bank.

The proposal has recently been discussed between senior bankers and regulatory officials, and chances are that it might impact earnings of many banks.

Going back in time, a similar rule was announced about 15 years ago. According to that rule, if a bank had tagged a loan as NPA, all other banks who dealt with that company had to do the same, no matter if the company did no default to them. The rule was considered too harsh and was thus scrapped.

"The proposal aims to protect banks from sudden blow that's inevitable when a large account turns NPA. If a company has missed interest payments to one bank which is treating the account as NPA, it is evident that borrower is either facing problems or promoters have misused the money. Now, if the cash flow problem persists, it's a matter of time it would default to other banks as well. These banks will then have to categorise the loan as NPA and provide for it. This extra provisioning will act as a cushion against future defaults," an expert told ET.

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