The Reserve Bank of India has issued a stern warning to public sector banks against any attempt to 'evergreen' their balance sheets for 2003-04.

RBI Deputy Governor KJ Udeshi told bankers at a recent meeting that the central bank was keeping a close tab on such activities, and any bank resorting to 'evergreening' would be taken to task.

Skirting act

'Evergreening' refers to a practice followed by banks to 'manage' their balance sheets through means that circumvent banking laws The RBI feels that banks might resort to 'evergreening' to contain their NPAs since they are shifting to the 90-day NPA recognition norms for calculating bad assets from March-end Bankers, however, say RBI's apprehensions are misplaced and they are fully prepared for the transition Some banks like Oriental Bank of Commerce, Bank of Baroda, Corporation Bank and the State Bank of India have adopted the 90-day norm

Evergreening refers to the practice of 'managing' the balance sheet through means, which may not be violating banking laws in letter but breaching them in spirit.

For instance, a bank can lend money to a company to pay off loan taken from another bank. This way, the second bank can save an account from going bad and thus reduce its non-performing assets. The second bank can then extend a similar facility to a company, which has not been able to repay loans from the first bank. This is the most common method of evergreening.

Some banks also disburse too many loans at the end of the year. This way they can increase their advances portfolio and reduce the NPA in terms of percentage.

The RBI feels that banks might resort to 'evergreening' to contain their NPAs since they are shifting to the 90-day income recognition norms for calculating NPAs from March-end.

Till now, banks recognised a loan as an NPA if either the principal or the interest was overdue for two quarters or 180 days.

Bankers, however, said RBI's apprehensions were misplaced and they were fully prepared for the transition.

In fact, some banks have already made additional provisions to adhere to the 90-day NPA recognition norm.

For instance, Oriental Bank of Commerce has declared itself a zero-NPA bank after shifting to the 90-day norm.

Bank of Baroda, for example, adopted the 90-day norm from December 2003. The bank's net NPA on December 31, 2003, slipped to 3.46 per cent, against 4.01 per cent in the corresponding period of the last financial year.

Corporation Bank adopted the 90-day NPA classification norm in December 2003. After the adoption of the norm, the net NPA level of the bank as on December 31, 2003, decreased to 1.7 per cent from 2.4 per cent in the corresponding period of the last financial year.

The State Bank of India's NPA level may go up marginally from 2.11 per cent on account of the change to the 90-day income recognition norm.