The Indian banks that are taking cautious moves while extending loans have been recommended by the Cabinet secretariat to continue following their prudential lending norms in order to avoid loans from moving into the non-performing assets (NPAs) category.

However both finance ministry and RBI are asking banks to loosen their strings to increase the flow of credit in the system. But Cabinet Secretariat is suggesting banks to turn prudent at this time of slowdown. A senior official in the Cabinet secretariat said, "We have suggested that if suitable measures are not taken in time to increase flow of credit, a cascading effect may set in, which may automatically increase the NPA of banks."

Bankers in the industry have already reported that the NPAs are likely to rise in the coming quarters. In fact in the first half of the current fiscal, NPAs for most banks increased by a substantial amount. The gross NPAs in domestic banks are 2% and net NPAs stand at only 1% which means that 1out 50 loans are not repaid after a defined acceptable level of default.

The banks normally make provisions for NPAs and the amount that still stand as NPA after the provisioning are classified as net NPAs. An asset is transferred into the NPA category if the repayment procedure of a loan does not start within 90 days.

Bad loans in the industry have been increasing ever since the financial crisis hit the globe and with the continuation of the slowdown they are expected to get worse with time. As senior official of SBI said, "We are keeping a close watch as the entire industry is facing challenging conditions due to the global financial downturn."

Banks are rather asking RBI to relax the deadline for recasting of loan repayment in order to avoid the loans given to the corporates to turn into non performing assets (NPAs).