While the percentage of gross NPAs to gross advances declined to 16 per cent in 1997-98 from the 17.8 per cent (Rs 43,577 crore in absolute terms in 1996-97), the net NPA figure moved down to 8.2 per cent from 9.2 per cent (or Rs 20,285 crore), the Reserve Bank said in its Report on the Trend and Progress of Banking in India 1997-98, which was released today. "NPAs still remain a major hurdle, act as a deadweight loss for banks and has (sic) acted as an impediment to lower lending rates", the report says, adding: "It is our endeavour that such deadweight losses are bought down substantially so that banks' balance sheets are clean and they can start on a clean slate".

Out ofthe Rs 45,653 crore (provisional) gross NPAs, priority sector advances accounted for Rs 21,184 crore, or 46.4 per cent of the total, with non-priority loans at Rs 23,107 crore accounting for another 50.6 per cent. In 1996-97, out of the Rs 43,577 crore, priority sector advances accounted for Rs 20,774 crore or 47.7 per cent of total NPAs, with non-priority loans at Rs 21,241 crore or 49 per cent.

Over a three-year period, the share of priority sector advances as a percentage of gross NPAs has moved down from 50 per cent to 46.4 per cent in 1997-98 while that of commercial loans has increased from 46.5 per cent to 50.6 per cent.

While the Reserve Bank report says that incremental NPAs in 1997-98--both gross and net--were less than 5 per cent of advances, more worrisome is the fact that the net interest income or spread for the banking industry has gone down.

During 1997-98, the banking industry's spreads declined by 27 basis points to 2.95 per cent from 3.22 per cent in the preceding fiscal. State-runbanks saw spreads dip by 25 basis points to 2.91 per cent from 3.16 per cent, old private-sector banks by 37 basis points to 2.56 per cent from 2.93 per cent, and new private sector banks by 70 basis points to 2.88 per cent from 2.18 per cent. Foreign banks saw the lowest decline by 21 basis points to 3.92 per cent from 4.13.

`Aye to reconstruction

The RBI has thrown it weight cautiously behind the idea of setting up Asset Reconstruction Funds (ARFs) to recover bank dues. According to the bank, ARFs should be useful in a limited way given the slow pace at which Debt Recovery Tribunals (ARFs) have worked due to legal and structural factors. The central bank's Report on the Trend and Progress of Banking in India for 1997-98 observes that "besides the use of ARCs, it is necessary to strengthen the system of negotiated settlements between lenders and banks to reduce NPAs. The report adds that "the crucial aspect of negotiated settlements is that they should be done in an efficient and transparentmanner".