Indian banks reject joint response to NPLs

India’s private banks have thumbed down a government proposal to pool their resources to service non-performing loans of individual banks.

They claim this “uniform asset classification” proposed by the Ministry of Finance would lead to legal complications since it will run afoul of existing laws.

The ministry has proposed that banks form a group and enter into a joint lending agreement for corporate loans of more than US$27 million or Rs 150 crore. In case a loan becomes non-performing for one bank, the member banks of the consortium will classify the loan as a non-performing asset.

Bankers involved in the talks, however, said private banks have refused to sign any such agreement, since they are uncomfortable with the NPA proposal. Banks also have different methods of asset classification in the sense that a loan that one bank classifies as non-performing might be classified as a standard loan by another bank.

Bankers said this uniform asset classification proposal would also lead to legal complications. Regulations set by the Reserve Bank of India (RBI) would have to be changed to implement the proposal, which will also deprive banks of remedies under the SARFAESI Act.

SARFAESI enables lenders to recover dues without court intervention. Under this act, banks and financial institutions can take possession of securities in case of a default and sell these to recover the loan.

The ministry has asked the Indian Bankers Association to hold discussions with RBI to amend regulations and enable uniform asset classification in case a borrower defaulted on loans from some members of the consortium.