Further problem for SME. The Reserve Bank of India (RBI) has turned down suggestions to relax rules for recognizing non-performing assets (NPAs) by doubling the duration to 180 days. RBI feels such a move will affect banks’ financial health. At present, banks treat a loan as an NPA if the payment is overdue for 90 days. Companies, especially small and medium enterprises (SMEs), had suggested that a loan should be treated as an NPA if it was overdue for 180 days Loan restructuring allows banks not to treat the account as an NPA. Banks often indulge in this exercise whenever they sense that the borrower is in stress and the account may turn into an NPA or bad loan. It enables them to declare a lower NPA ratio — the percentage of sticky loans to total loans — a dead-weight on their books. Also, once an account is deemed as an NPA, the bank has to make some provisions, which affect its bottom-line. If a real estate company fails to repay loans on a due date, the bank will either accept it as an NPA and restructure the loan or resort to legal action. But RBI refusing to the request of the SME when the sector is plummeting and reeling under pressure. Where as Banks have urged RBI that given the global turmoil and the slowdown in the economy, banks should be given a second chance to restructure the loan of manufacturing companies while allowing them to classify the same as standard assets. Increasingly, Indian firms are finding that the cost of borrowing abroad is rising — a sea change compared to the scenario over a year ago when they raised funds from global loan markets at competitive rates. Bankers have their loan portfolios on fears that a global slowdown could impact domestic companies. The slowdown could affect the demand scenario and thereby result in loan defaults. That is what has happened now in real term. The SME’s had suggested the move because they were facing cash flow problems due to a slowdown in demand in domestic and overseas markets, resulting in repayment problems. The crisis on the Wall Street has already damaged the fund-raising plans of India Inc hard. Along with this the appetite of foreign investors for Indian shares at its lowest level in the recent times, plans of many companies to float overseas issues are unlikely to materialize in the near future hence another route of fund raising avenue collapses.. Turning down this request of extension will force the banks to become more skeptical in lending. Already the banking segment has invested 70% of the funds released via interest cuts made by RBI. The export segment is already on the verge of death. The latest survey of 402 companies done by the ministry has revealed that about 109,000 workers were laid off from export dependent sectors in the current fiscal up to January 15.
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