Non-NPA NPAs: How Lenders Are Dealing With Supreme Court’s Hold On Bad Loan Recognition

In an order dated Sept.3, the apex court had said that accounts which were not declared as NPAs till August 31 cannot be tagged as such until further orders. The directive had come during the hearing of the compound interest or interest-on-interest case. While the government has announced a compound interest waiver since, the bar on NPA recognition continues.

Finding Go-Arounds

Four senior bankers, who spoke on conditions of anonymity, said that while an account may not be tagged as an NPA, lenders are dealing with them as defaulters to the extent possible.

Banks typically hold back any fresh lending to accounts which are tagged as non-performing. According to a senior official as State Bank of India, the lender is doing this in the cases where repayments are overdue by more than 90 days even if the account has not been officially tagged as an NPA.

SBI is also initiating some loan recovery measures including a dialogue with the borrower and recovery notices. However, because the account is not an NPA, the full suite of recovery options cannot be initiated. An NPA tag allows bankers to impose restrictions with more rigour, the banker quoted above said.

A second banker, an official at a public sector bank, said that working capital limits of accounts which are overdue by 90 days are being curbed, as would be the case with an account officially tagged as an NPA.

A third banker, the head of another public sector bank, said that while softer recovery measures are being initiated lenders have to be careful about the optics involved in attaching and recovering assets from smaller borrowers. Since the impact of the pandemic is still in effect, bankers have to be careful, to avoid any criticism of being too tough on retail and small business borrowers, this banker said.

Accounting For Non-NPA NPAs

In the July-September quarter, most large banks reported gross NPA ratios keeping the Supreme Court’s interim order in mind. Additionally, they also disclosed pro forma gross NPAs, which showed where the asset quality numbers would have been if the interim order was not in effect.

Dhananjay Sinha of Systematix Group said that considering the pro forma NPA disclosures made by large banks, there is a variation of about 100-120 basis points in the reported NPA and the actual NPA figures.

“Apart from a disruption in reporting of asset quality numbers, there will be an impact on banks booking interest income on standard accounts which should have been NPAs. There will be changes in the future income growth for banks, once these accounts are classified as NPA,” Sinha said.

Shriniwas Joshi, a partner at accounting firm CVK & Associates, agreed. Unless a defaulter is tagged as NPA, the process of booking interest continues, which gives a skewed picture of the bank’s earnings, Joshi said.