A loan account that has remained in NPA category for 5 years must be classified as a doubtful III account and fully provided for, as per RBI.
As a large number of micro, small and medium enterprises (MSMEs) and retail loan accounts slipped into the doubtful III category, State Bank of India (SBI) put Rs 8,453 crore worth of such bad loans on sale during the quarter ended March. According to bid documents issued by the bank, MSME loan pools of varying sizes were put on the block in four tranches during the quarter.
A loan account that has remained in the non-performing asset (NPA) category for five years must be classified as a doubtful III account and be fully provided for, as per the Reserve Bank of India’s (RBI) 2015 master circular on prudential norms on income recognition, asset classification and provisioning pertaining to advances.
“We typically put an MSME account up for sale when it slips from the doubtful II to doubtful III category, because then the provisioning burden rises to 100%,” a senior executive at the bank told FE. An account in the doubtful II category is one that has remained in the NPA category for over two years and under five years. The secured portion of such an account attracts 40% provisioning, while the unsecured portion attracts 100%.
SBI is looking to settle all the accounts it is offering on a 100% cash basis. Reserve prices put out by the bank suggest that it may take haircuts of up to 82% on some MSME accounts.
However, the reserve prices set for some of the retail loan pools are higher than the amount outstanding, suggesting that the bank will recover more than it has provided against these accounts.
Loans to MSMEs have become a sticky point for banks over the last few years amid demonetisation and the rollout of the goods and services tax (GST). In January this year, the RBI had allowed banks to carry out a one-time restructuring of existing loans that are in default but standard as on January 1, in order to ease the impact from the two blows of note ban and the GST.
In November, FE had reported that delinquencies on account of MSMEs rose to a high 13.08% for public sector banks at the end of March 2018, compared with 12.56% in March 2017.