Banks ask RBI to relax NPA norms for real estate sector
By Vaibhav Aggarwal
Dec 8, 2008
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Commercial banks in the country have asked RBI to declare a standardized norm for restructuring debt to realty companies in order to escape the chances of loans extended to troubled real estate companies to turn bad loans.

Presently, loans given to real estate, capital market or personal loan segment are declared as a bad loan by the lender at the time of restructuring of the loans. However credit extended to other sectors are not classified as non-performing assets (NPAs) on one-time restructuring.

The real estate firms have been hit hard by the liquidity crunch and are asking banks to rollover the loan, following which CEOs of many banks have asked RBI to relax the restructuring norms of these realty firms. Banks feel that these companies should be given an option of additional line of credit or rescheduling of loans so that their NPAs do not mount up.

Restructuring of a loan enables a bank to avoid an account from falling into the NPA category. Banks go in for restructuring when they feel that the customer's account may turn into an NPA or bad loan. This practice allows them to reduce their NPA ratio and thereby maintain their profit margins. If an account is considered to be NPA then the bank has o make provisions for it and this impact the bank's margin adversely.

Banks think that restructuring of loans extended to real estate is necessary as of now because they are facing severe crunch and if they do not follow this practice then their bottomlines are bound to decline. In fact some banks have started restructuring their real estate loans and some others are finding options to reschedule loans extended to this sector without showing them as NPAs. A source form the banking industry said, "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."

In the mean time, banks have also asked RBI to relax restructuring norms on loans given to manufacturing firms. Presently when a loan extended to a manufacturing company is restructured for the first time, it is treated as a standard asset but when it is restructured for the second time, it falls in the sub-standard category of assets.

Bankers have put forward this appeal in a meeting with the RBI's governor D. Subbarao.


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