Public sector lenders have urged the regulator, Reserve Bank of India to revise the stated norms for asset classification.

The current norms stipulate that if a borrower defaults on any of the bank advances, then all other borrowings by the respective must be treated as NPA by the lending bank.

The norm revision aims to segregate the bad loans from good (performing) ones. Presently, the accounting norm require the lending banks to the treat the entire credit exposure as non-performing, even if only one of the loan/advance is non-performing. To state it simply, if an individual borrower defaults on his credit cards, then the bank will classify all loans (personal, home loans and others) taken by the person as non-performing assets.

Once a loan is classified as a bad account, the lending bank has to set aside 10 percent of the outstanding loan amount as ‘provision'. Larger defaults also imply larger provisions, which lead to lowering of stated net income. This hits the bottom-line of the bank and increases ratio of bad loans in the accounting books, which affects the overall bank performance and image.

The suggestion to amend the existing norm was made by the top executives of major banks in a post-budget meeting held on July 7 with the RBI governor D Subbarao. The move comes to gear retail lendings at a time when industry credit is failing to take off. Contradictorily, bankers expect interest rates to soar in near future.