Speaking on the ``Second Narasimham Committee Report'' at the National Institute of Bank Management (Pune), Tarapore observed that the downgrading of an asset in the Indian system was lax as it so classified only after being past due for thirty months or remained in the sub-standard category for twenty-four months.

"Learned critics have argued that with the slowdown of the economy, this is not the right time to tighten prudential norms. We need to realise that pain has to be managed at all stages of an economic cycle. Moreover, the bulk of the NPAs are accumulated during the upturn of an economic activity, and if we are to believe thegovernment spokesmen, an upturn is on the anvil. The authorities should not fall prey to the seductive doctrine of those arguing lax norms," Tarapore said.

According to Tarapore, banks need to be particularly careful about not picking up NPAs in the ensuing business cycle. "It is nobody's case that we should have a one-shot move to international norms; while a gradual approach would be advisable, we should not use the ruse of real sector developments to advocate a policy of paralysis in reforms. There are obvious dangers in adopting prudential norms, which are lax in comparison with international norms," Tarapore said.

Pointing out that the auditor's role is not merely to closely examine banks, but more importantly to examine the standard asset portfolio of banks as it is in this that NPAs are erroneously lodged, Tarapore said, "Auditors need to locate cases of `evergreening' wherein fresh advances are given essentially to keep accounts in order."

Touching upon the related issue of setting upasset-reconstruction conpanies (ARCs), Tarapore said, "The difference between an ARC and the earlier proposal for an asset reconstruction fund (ARF) is that under the ARF, the government would have to pick up the tab of banks' losses while in the ARC, the government would not undertake any funding, as the ARC would be a commercial enterprise." The former deputy governor said that "at best, the government could use the Rs 400 crore budget allocation as seed capital for ARCs," but cautioned that "the Reserve Bank should, under no circumstances, provide any capital support or other indirect financing for the ARCs."