The Reserve Bank has eased some of its conditions that measure bad loans to save banks from putting aside more cash provisions to cushion them, in view of the tough operating environment in the economy. The loans would soften the blow of defaults in the current difficulties in the system.
Banks no longer have to treat all loans to a customer who has defaulted on a complex foreign currency derivative under a borrower-wise asset classification and also need not make provisions for distressed home loans which are restructured to enable borrowers to repay in more than 10 years.
Such a relaxation had earlier been given to restructured infrastructure loans.
The Reserve Bank of India (RBI) has said in circulars banks need not classify loans to a company as non-performing assets (NPAs) even if the client defaults on its obligations on complex foreign currency derivatives. This relaxation applies to exotic currency derivative contracts signed between April 2007 and June 2008.
The RBI retraced its steps just a fortnight after it said that defaults on all currency derivatives would entail applicability of the principle of borrower-wise asset classification — which means banks have to classify all accounts of a customer as bad if there is a default on any one of them.
Banks agree to restructure a home loan in order to allow the distressed borrower a lower equated month instalment (EMI) over a longer period.
According to a research by rating agency CRISIL, home loan defaults are estimated to rise to 2.7 per cent of total outstanding at the end of March 2009 from 2.2 per cent at the end of March 2007.
A derivative is a contract between two or more parties and its value is decided by changes in the underlying assets like currencies, interest rates, bonds, stocks and commodities.
Several banks including ICICI Bank, Axis Bank, Kotak Mahindra Bank and Yes Bank have faced defaults by corporate customers on their complex currency derivative contracts when the Japanese yen and the Swiss franc appreciated sharply against the dollar. These banks also faced litigations from the defaulting customers, though the banks found favourable verdicts.