The panel, which submitted it report last week, has suggested that the ARC can be an alternative to the asset reconstruction fund (ARF) -- which had earlier been recommended by the first Narasimham panel on financial sector reforms set up in 1991. The committee has said that all loan assets in the doubtful and loss categories should be identified and their realisable value determined. ``These assets could then be transferred to a reconstruction company,'' it said.

However, bankers are arguing for dilution of NPA norms. A committee set up by the Indian Banks Association had recommended negotiated settlements between banks and borrowers. Such settlements will of course involve several write-offs and concessions.

The Narasimham panel is in favour ofreducing the timeframe for treating an asset as a substandard one in case of default in interest payment from the current practice of 180 days to 90 days. It suggested that after the ARC is set up, it would issue NPA swap bonds to the banks for the realisable value of the assets transferred. The company could be set up by one bank or a set of banks. The panel is open to the idea of private sector banks participating in it.

The company will have to file suits with debt-recovery tribunals for getting back the loans. In the private sector, a bank wishing to hive off its bad loans will have three options: negotiating for a one-time settlement and down-payment or staggered payments over a period of time, transferring the assets, or carrying the loan in its books. The funding of such a company could be facilitated by treating it on a par with joint venture capital for the purpose of tax incentives.

The committee has suggested that the high level of bad loans represents a continuing potential threat to theviability of the system. The committee believes that the objective should be to reduce the average level of net bad loans of all banks to below 5 per cent by 2000 and to 3 per cent by 2002. For banks with an international presence, the minimum objective should be to reduce gross bad loans to 5 per cent and 3 per cent by the 2000 and 2002, respectively, and net bad loans to 3 per cent by 2000 and to zero levels in 2002.

The committee has suggested that banks should move away from the current practice where income stops accruing when interest or installment of principal is not paid within 180 days towards the global norm of 90 days. The panel's report said the 90-day norm should be introduced in a phased manner by 2002.

With regard to asset classification, the committee has suggested that there should be provisioning norm for standard assets as well. Currently, banks are not required to provide for standard assets. Banks are required to provide for 10 per cent for substandard assets which turn doubtfulafter two years. In case of doubtful assets, banks are required to provide for 20 per cent for the unsecured portion in the first year, 30 per cent in second year and 50 per cent in third year. The unsecured portion needs to be fully provided for.

The committee has suggested that income recognition, asset classification and provisioning norms should apply to the government-guaranteed advances also.

Sticky loans pile up in banks, FIs

MUMBAI: The NPAs of commercial banks at the gross level have already exceeded Rs 43,500 crore for the year 1996-97 as against Rs 41,600 crore in the previous year. The NPA at the net level is Rs 20,285 crore as against Rs 18,297 crore in the previous year. When a borrower defaults two terms, it is classified as NPA by the bank.

According to the RBI, almost all commercial banks, including public sector, private and foreign banks, have NPAs. Bank of Baroda has a net NPA level of Rs 1477.96 crore, Indian Bank Rs 1735 crore,Punjab National Bank Rs 1441.74 crore and Central Bank of India Rs 1267 crore. Federal Bank's net NPA is Rs 214.38 crore, Bank of Rajasthan Rs 132 crore and Bank of Tokyo-Mistubishi Rs 189 crore.

FIs are not lagging behind in accumulating NPAs. ICICI's net NPA shot up from Rs 1950 crore to Rs 2810 crore for the year ended March 1998. Banks and institutions are rescheduling their sticky loans to keep them out of the NPA bracket, sources said.