Stock markets revalued banking stocks to historic lows and in the process shaved off more than 50 per cent of their share prices from January, 1998, levels. NPAs occupied the prime slot in banking-related media reports throughout the year, while international rating agencies placed the domestic banking system below even some of the financially paralysed southeast Asian countries like Indonesia and Malaysia.

Standard and Poor's placed the real NPA level in the system anywhere between 50 per cent and 70 per cent of the total advances, while officials of New York-based Thomson BankWatch, the largest bank rating agency in the world,have said Indian banking system has a much higher NPA level than is revealed in official statistics. On the other hand, official RBI figures mention 16 per cent gross NPAs for public sector banks, which account for more than 95 per cent of banks' total assets.

Bankers, however, say the fear over NPAs is exaggerated. Apart from the recessionary conditions, where even the established and healthy companies are failing to keep their production lines fully occupied. They, in fact, say the new NPA calculation norm in India is tougher than anywhere else in the world. The value of collatoral is not taken into account at all while provisioning for bad assets according to the new RBI norms, they say. Some financial institutions like ICICI have demonstrated that their NPA levels will be substantially lower if calculated according to internationally accepted Basle standards.

Refutations, knee-jerk reactions and numerous committees later, the realisation is that NPAs are not going to disappear overnight. The factorsthat inhibit banks from getting tough on bad accounts call for a drastic revamp of existing legal systems, which everyone, including banks and the central bank, agree is a long haul.

So the RBI and the Indian Banks' Association has embarked on the next best option available: Contain the spread of NPAs and devise measures to stay afloat the economic trough.

In order to rein in NPAs, banks and financial institutions have virtually stopped extending credit to riskier new industrial projects and small enterprises. They have, instead, turned their attention to low-risk retail credit like consumer finance, housing finance, automobile finance and personal loans. Though low in volume and time consuming, these new endeavours kept bankers occupied for most part of the year. For big volume, low-risk infrastructure credit has come in as a blessing. Thus, banks manage to maintain a healthy credit growth rate and cut down on riskier industrial credit.

To overcome the dangers of higher NPAs, banks are working on twofronts. On the fire-fighting front, the measures that are in the process of being implemented or introduced include off-the-court compromise settlement of default accounts, transfer of unbearable NPAs to asset reconstruction companies, clipping governments from giving non-realisable guarantees and tougher prudential norms and capital adequacy requirements for banks.

At the ground level, banks are in the process of settling NPAs through reconciliation with defaulting companies without taking a detour to the court. Banks are able to save opportunity cost and redeem their balance sheet of disproportionate provisioning, thus booking a notional loss by writing off a portion of actual dues. The situation has also infused the much-required innovative thinking among banks. Some banks have introduced longer cash credit periods that will delay an account from turning into an NPA as well as give the recession-hit corporates a breather. Some innovative deals like back-to-back sale agreement of defaulters' real estateassets to get NPA accounts back on their feet are being worked out.