NPA sales: RBI issues new norms, includes pre-Feb 2014 sales

In a boost to banks which are facing rising asset quality issues, the Reserve Bank on Wednesday allowed such lenders to reverse the excess provision on sale of bad loans to their profit and loss account provided the transaction took place before February 26, 2014.

The central bank had on the February 3 monetary policy day said that it would issue the final guidelines on this front after banks requested it to include the provision to those sales took place before February 26, 2014 as well.

The move is aimed at incentivizing banks to recover appropriate value in respect of NPAs (Non-Performing Assets).

Almost all the banks, including private sector players, have been reporting higher NPAs and lower profits as they have to make more provisions for bad loans, which crossed 5.5 per cent as of end December. Together with restructured loans, the total pain on the system is close to 12 per cent.

The new guidelines extending the sale period prior to February 2014 will help banks report better numbers and thus take a little pain off their back.

From April 1, banks will have to make full provision-5 per cent of the bad asset-if they have restructured the loan, and the entire amount if the asset in Corporate Debt Restructuring (CDR) turns bad.

Today, the apex bank said new guidelines will be applicable if only the excess is for a value higher than the bank's Net Book Value (NBV).

"We reiterate that banks can reverse excess provision arising out of sale of NPAs only when the cash received by way of initial consideration and/or redemption of security receipts/pass through certificates is higher than the NBV of the NPAs sold to a securitisation company or an asset reconstruction company (RRC)," RBI said in a notification.

Further, the notification said, "The quantum of excess provision reversed to profit and loss account will be limited to the extent to which cash received exceeds the NBV of the NPAs sold."

It also made it mandatory for banks to report the quantum of such excess provision reversed to the profit and loss account in the financial statements of the bank under 'notes to accounts'.

Bad loans in public sector banks more than tripled to about Rs 2.17 lakh crore in three years to March 2014.