Banks are shifting to a technology-based platform to calculate non-performing assets (NPAs) in the fourth quarter

Source : The Telegraph: Monday , May 30 , 2011

Mumbai, May 29: PSU banks are shifting to a technology-based platform to calculate non-performing assets (NPAs) in the fourth quarter — a period the lenders reported fresh defaults and made higher provisioning for bad loans.

Bankers and analysts said the shift to the new platform was one of the main reasons for the rise in bad assets during the fourth quarter.

The new technology is part of the banks’ core banking solution (CBS), replacing the earlier practice of tracking bad loans manually.

According to the Reserve Bank of India’s (RBI) norms, if either the interest or the principal on a loan is overdue for more than 90 days, the account becomes NPA.

Banks have to make provisions, or set aside funds, against such loans.

Last year, the finance ministry had directed PSU banks to identify bad loans with the help of technology rather than manually. The ministry had asked the banks to migrate to such a system by March 31.

This deadline has now been extended till September because of software-related problems.

Indian Bank began moving to the new system from April last year, while the Bank of India, Canara Bank, Andhra Bank are in various stages of implementation with agricultural loans and advances up to Rs 50 lakh yet to come under the platform.

Bankers say by September, the remaining loans will be covered.

Under the technology-based platform, NPAs are tracked on a daily basis through the use of computers.

Bankers pointed out that the earlier practice gave some discretion to the officials, which might have led to lower NPAs.

However, in the system-generated method, NPAs are immediately identified. This is one of the reasons why PSU banks adopting the new system have shown a rise in bad loans.

“It (the new method) certainly leads to transparency and prevents any form of manipulation. Moreover, it gives an accurate picture compared with the manual intervention,’’ says a senior official of the Bank of Baroda (BoB).

A significant part of BoB’s loans are now under the new method.

Manish Karwa, M.B. Mahesh and Nischint Chawathe, banking analysts at Kotak Institutional Equities, recently said in a note that bulk of the slips in the fourth quarter was because of the efforts made by public sector banks towards a stringent recognition platform for non-performing loans that disallowed any manual intervention.

The analysts warned of fresh defaults in the next two quarters.

“We expect more slippages in the first half 2011-12 from this transition as most public sectors are yet to fully complete the transition of their overall loan portfolio.”