The Reserve Bank of India (RBI) has declined to relax the norms for identifying a loan as non-performing assets (NPAs) if the payment is overdue for 180 days as compared to the present duration of 90 days.

Sources in the industry said that the Central bank has turned down to relax the rules because it is trying to bring the prudential norms in Indian banking in line with the international standards. "Therefore, diluting the NPA norms for SMEs is not considered as a step in the right direction at this juncture," said RBI in a letter issued to the Indian Banks Association (IBA).

Companies, especially the small and medium enterprises (SMEs) had asked RBI to relax the NPA norm and increase the overdue date from 90 days to 180 days. This suggestion was given by SME in the backdrop of liquidity crunch faced due to a demand slowdown in both domestic and overseas markets.

However RBI turned down the SME suggestion and said that it has taken "multi-dimensional steps" to infuse liquidity into the system and thereby ensured credit availability to productive sectors of the economy. It feels that such a move is likely to hamper the financial health of the banking industry.

At the same time RBI also declined on a proposal that would allow all term loans extended to SMEs for one year to freeze.

Industry sources claim that the Central bank has already permitted banks to categorize loans as a standard asset if they are restructured twice. Further the RBI said that tightening of norms, improvement in asset origination and strict monitoring and recoveries have enabled banks to avoid the NPAs. The gross NPA as a percentage of gross advances declined from 5.2% in 2005 to 2.3% in 2008 but gross NPAs in 2008 increased. This was the first time gross NPAs for the Indian banking sector increased since 2001-02.

Banks have been witnessing an increasing credit growth from the last three years but at the same time bad debts had also been rising with the credit growth.

Earlier banks had asked RBI to relax NPA norms for the real estate sector. Banks wanted RBI to declare a standardized norm for restructuring debt to realty companies in order to avoid the chances of loans extended to troubled real estate companies from turning bad loans.