Bank NPLs: How to avoid them
A very interesting article at Sify Finance talks about some of the things banks are doing to avoid real estate loans turning into non-performing loans (NPLs).
About NPLs:
Under current regulations, if the debt service payments are overdue for more than 90 days, the loans automatically become NPAs.
A chief executive of a public sector bank said the realty non-performing loans (NPL) portfolio of his bank was as high as 3% of the gross housing loan assets . . . . . the situation was similar in almost all the public and private sector banks in the country, he added.
In some of the banks, the NPLs were as high as 4%, bankers said.
How banks avoid NPLs:
Some private sector banks that have extended high value loans have stretched the maturity to 25 years. For the banks, this meant the loans would continue to remain standard asset on its books.
This also allowed the banks to realise the income on the loan and at the same time averted the need to make provisions for substandard assets.
In the case of fixed rate loans, the bankers said, they were not prepared to exercise the interest rate reset clauses as provided in the covenants, for fear of converting the assets into NPLs.
If banks continue to do this, they are simply postponing / prolonging the pain!
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