The Centre is trying to convince the Reserve Bank of India (RBI) to ease prudential guidelines regarding asset classification by banks. This is in the backdrop of the rising Non-Performing Assets (NPAs) of banks, especially the public sector ones.
Official sources closely involved in the matter told FE that while the RBI might look at such relaxation only when the situation reaches a flash point, there is already a signal from the top level of the government for some ?regulatory forbearance? as things are going beyond the control of borrowers.
What is being proposed includes an option of restructuring of NPA accounts, they added.
The government has again taken up the case of reduction of key policy rates with the banking regulator, they said, indicating that chances are “bright” regarding a 1% reduction in Cash Reserve Ratio (CRR).
A 1% cut in CRR (portion of a bank?s total deposits that has to be held as cash) will infuse an additional liquidity of R70,000 crore into the system, which will in turn help banks to pass it on to the borrowers through lower interest rates as the cost of funds.
The RBI had on September 17 cut the CRR by 25 basis points to 4.5%.
Citing inflation and risks arising out of a high fiscal deficit and current account deficit, the central bank had not changed repo and reverse repo rates.
Repo (the rate at which the banks borrow from RBI) now stands at 8%.
?This (engagement with RBI) is not interfering with the regulatory regime, but sensitising them on the latest situation of the economy,” an official said, adding that a positive signal from the RBI was important for boosting the industry, banks, internal market and the overall economy.
While agreeing that regulatory forbearance should not be used frequently, the sources said the current extraordinary circumstances? where the domestic and global economy is faring poorly ? demand some easing of regulation on the part of RBI, as the central bank is also responsible for monetary stability besides being a sectoral regulator.
Easing of prudential norms was extremely important considering the fact that several long-term infrastructure projects such as roadways are being held up on account of land acquisition delayed beyond the control of borrowers, while several power projects are stuck up due to lack of immediate availability of coal, they pointed out.
According to the RBI, norms on income recognition needs to be based on the bank’s record of recovery and not on any subjective criterion.
The RBI also had pitched for similar objective classification of assets of banks.
The recent Mahapatra committee report on debt restructuring had called for doing away with the RBI?s regulatory forbearance after two years. The government as well as the bankers feel that such a move will only lead to more restructured loans turning into NPAs.
?There is a contagion-like situation… We are concerned about the implications on the financial sector, including the impact of the held-up projects on the banks,” the official said.
?The government is trying to give a psychological boost to the economy, but the RBI also must do something now.?