Saturday, December 6, 2008

Banks try to avoid classifying advances to troubled real estate companies as bad loans or NPA

Relax restructuring norms to enable banks to declare a lower NPA ration!

In a recent meeting with RBI governor D Subbarao, CEOs of many large banks urged the regulator to relax the restructuring norms. They pointed out that a number of real estate companies have been complaining about the liquidity crunch and have approached lenders to rollover the loan.

However, there is a resistance among banks to give them an additional line of credit or reschedule their loans on the ground that this will add to their pool of NPAs.

Loan restructuring allows banks not to treat the account as an NPA. Banks often indulge in this exercise whenever they sense that the borrower is in stress and the account may turn into an NPA or bad loan.

It enables them to declare a lower NPA ratio — the percentage of sticky loans to total loans — a dead-weight on their books. Also, once an account is deemed as an NPA, the bank has to make some provisions, which affect its bottomline.

If a real estate company fails to repay loans on a due date, the bank will either accept it as an NPA and restructure the loan or resort to legal action.

Some banks have already come to terms with this and have begun restructuring their real estate loans while a number of banks are looking at ways to reschedule loans to this sector without showing it as NPAs. “A bank has recently asked a builder to somehow arrange for funds on the due date. And, subsequently, it extended an additional line of credit to the company,” said a source. -The Economic Times

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