Disclosing this development, State Bank of India chairman MS Verma told an assembly of bankers at the global banking conference on Thursday that the instances of the Centre approaching banks with compromise proposals have been rare. However, the state governments have virtually made a beeline to settle sticky loans through `compromises'. "They can always do that in their capacity as guarantors to these loans. Banks are willing to strike compromise deals," Verma said.

This development is extremely significant as the government guaranteed loans account for a sizable part of the total sticky loans of the banking sector which is pegged at about Rs 45,000 crore. Going by the Reserve Bank of India guidelines, banks are not required to provide for those sticky loans which are backed by government guarantees even though they are required to classify them assubstandard, doubtful and loss assets.

The banks need to provide for these loans only when the government repudiates the guarantee. However, rarely does a government repudiates a guarantee as a result of which the NPA on account of sticky loans bulge in banks' books even though they are not required to provide for them.

The second Narasimham panel on banking sector reforms has recommended in favour of banks' making provisions on account of sticky loans, backed by government guarantees. The RBI is likely to accept the recommendation as governor Bimal Jalan on Wednesday said the central bank and the finance ministry are in favour of stricter income recognition norms.

The NPA issue has kicked off a debate in the three-day global banking conference. While the bankers feel that the situation is not as bad as it has been projected, RBI governor categorically said it is a serious issue. He has urged the bankers to take an "exaggerated view of the NPA" which will help them tackle the situation on awar-footing.

IBA chairman AT Pannir Selvam said the percentage of NPAs in the banking system is negligible compared with some of the advances countries. He also blamed directed lendings for the bulging NPAs. According to him, the incremental NPA post 1992-93 -- when RBI kicked of the first phase of financial sector reforms -- has been manageable.

SBI chief Verma also said the "situation is not alarming" and banks have been improving the quality of assets every year. Bankers across the board are in favour of writing off those bad loans for which the chances of recovery are slim.