Public sector banks--led by the State Bank of India--will be the biggest casualty of the inclusion of government-guaranteed loans for the purpose of NPAs classification. "The government guaranteed advances which have turned sticky are to be classified as NPAs as per the existing prudential norms with effect from April 1, 2000," said the mid-term review of monetary and credit policy document.

Till now banks were exempted from categorising these loans as NPAs as well as makingprovision for them even as they were barred from booking income on the sticky loans backed by government guarantees. Though exact figures are not available, industry observers say it will a hefty amount considering the fact that state governments are currently under extreme fiscal duress and many state PSUs and corporations are the running at loss for decades.

As per the latest Reserve Bank of India annual report, the total outstanding government guarantees--of centre as well as states-- is to the tune of Rs 1,18,000 crore as on March 31, 1996, which has gone further up since.

While a part of the guarantee has been issued against various bond issues, a large chunk is accounted for by loans from banks to state boards, corporations and PSUs. State government enterprises like road transport corporations and electricity boards in most states are running at loss for decades together. A substantial portion of this, together with accounts of sick PSUs at the state level may be NPAs with banks, analysts feel.

Though information on the extant of each bank's exposure to government guaranteed loans is not available, it is widely expected that public sector banks will be having the major share.

Another NPA norm to hit the profits of banks hard and across the board will be the shortening of transfer period from a sub-standard asset to doubtful category to 18 months from the earlier 24 months. "An asset will be treated as doubtful, if it has remained in substandard category for 18 months instead of 24 months, by March 31, 2001. Provisions for this can be made in two phases, 50 per cent by March 31, 2001 and the rest by March 31, 2002," said the RBI document. RBI has also stated that it will later on reduce the transference time frame to 12 months.

According to a senior public sector bank official, this could trigger as much as 25 per cent increase in provisions for bad debts. This will become particularly true against the backdrop of overall deterioration of asset quality. "The rate of asset quality slippageshas been much more than upgradation during the last one year," he said.

Analysts said while the norms will start affecting the balance sheet only from the fiscal 2000-2001, banks are likely to begin the cleaning up this fiscal itself. The bank profitability this fiscal is already under strain following slowing credit and the higher depreciation provisions on investments that banks are likely to put aside this year.

Analysts are hopeful, however, that RBI will not do something that will affect the profitability of banks across the board and severely. The fact that most of the newly announced measures are staggered during the next two to three year period is indicative of this, they say.