Banks may soon be asked to provide – set aside funds – for potential non-performing assets (NPAs) and weak assets, sources aware of the development said.

Sources said that banks could be asked to provide for potential weak assets which, although require standard asset provisioning as per IRAC norms, could burden banks’ balance sheets in the future. According to income recognition and asset classification norms (IRAC), a standard asset entails a 0.4% provision, whereas an NPA needs at least 15% provision.

This, people said, is part of the central bank’s plan to urge banks clean up balance sheets by March 2017. Reserve Bank of India (RBI) governor Raghuram Rajan had said recently that the central bank would want to put something like March 2017 on the table by when clean-up will have to be done.

“This is an ongoing process and I hope the banks recognise more of what needs to be recognised and they deal with the stressed assets,” he had said.

However, it could be immediately ascertained how much money will banks have to set aside if a preemptive provisioning is implemented.

Sources explained that since banks have been provided with strategic debt restructuring (SDR) and 5/25 tools, they are expected to classify accounts and provide for them accordingly so that their balance sheets look cleaner by 2017. Banks have been told that this would ensure they have a buffer to absorb any eventuality.

Sources said that some banks are shying away from taking action against some truant borrowers and providing according because they fear a capital erosion.

Last week, in its financial stability report (FSR), RBI had warned that gross non-performing assets (NPAs) ratio – bad loans as a percentage of total loans– of the Indian banking system could reach 5.4% by September 2016. The gross NPA ratio stood at 5.1% in September 2015.

According to the report, the bad loan ratio could subsequently improve to 5.2% by March 2017. The central bank had also expressed concerns on the debt servicing capability of large borrowers which in turn, was affecting the health of the banking sector. Customers with aggregate loans of R5 crore and above are classified as large borrowers. (Financial Express)