New Delhi, July 28: The finance ministry has opposed changes to a rule that requires state-run banks to treat all loans given to a company as bad even if one account with any of them turns bad.
Both banks and companies have been lobbying to scrap the rule.
Bankers are worried about the greater provision they have to make against bad loans, thereby eating into their profits, while companies do not want loans to dry up.
Industry representatives said that if a loan was not paid because a particular project or a group company was facing a rough patch, the parent company and all its bank accounts should not be labelled as non-performing as the other loans were being paid on time.
A non-performing, or bad, asset in a bank's books means not only greater provisioning but also a bar on further lending to the company and its subsidiaries.
The North Block, however, feels the norm is necessary as it warns other banks of possible defaults and puts pressures on a company to square off its bad debt.
Gross NPAs of state-run banks stood at 3.66 per cent of total assets as on December 2012. For the SBI and its associates, it was as high as 5.34 per cent.
Recently, the Reserve Bank of India has asked banks to increase provisioning for newly restructured loans by 3 percentage points to 5 per cent after noting that loan restructuring is not paying off in many cases and leading to repeat defaults.
Bankers said they were often forced to restructure loans under pressure from the government, which wanted to kick-start growth and protect jobs.
Gems and jewellery firms, realtors, textile and aviation companies are among the defaulters with public sector banks.
In many of these cases, while repayments on one account have been delayed sufficiently to classify it as a bad debt, the money flow is intact in the other accounts.
However, many bankers and North Block officials argued that one loan going bad was a sign of things to come with the whole group.
Officials also pointed out that promoters often took fresh loans for risky ventures, while unwilling to accept responsibility for projects that had resulted in bad loans.
"Firms, creditors go bust, but promoters never seem to face tough times," said officials.
They say the bad loan rule has helped many banks stay out of more trouble.
Banks, however, have been very strict in the interpretation of norms on bad loans and been aggressive in trying to recover them.
The SBI has been among the most aggressive. India's No. 1 bank had even written to the Director General of Civil Aviation stating its opposition to Captain G.R. Gopinath's application to float a budget airline on the grounds that Gopinath, a pioneer of low-cost aviation, had not paid the loans of his previous ventures.
The bank is also cracking the whip on Vijay Mallay's Kingfisher Airlines to recover dues.
