What is Divergence in loan recognition?
Divergence takes place when the Reserve Bank of India (RBI) finds that a lender has under-reported (or not reported at all) bad loans in a particular year and hence asks the lender to make disclosures if under-reporting is more than 10% of bad loans or the provisioning.
Which are the banks at default?
Three state-run banks — Union Bank of India, Indian Bank and Central Bank of India — had reported divergence while announcing the results. In all these banks, divergence was spotted for the financial year 2017-18.
Divergence was identified not because these banks hadn’t classified the loan as non-performing assets (NPA) but because they were late in classifying them.
CATEGORIES OF NPAs
According to Reserve Bank of India (RBI) guidelines, banks are required to classify NPAs further into substandard, doubtful, and loss assets based on the time period of pending debts.
1. Substandard assets: Assets that have remained NPA for a period less than or equal to 12 months.
2. Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
3. Loss assets: A loss asset is considered uncollectible or is of such little value that its continuance as a bankable asset is not warranted, although it may have some salvage or recovery value.
How divergence leads to higher provisioning?
Since the date of classification as NPA had been pushed back, the banks had to make higher provisioning. In the first stage of NPA, which is the ‘sub-standard’ category, 15-20% provision is required and for next category, which is ‘doubtful’, a 40% provision is required.
So, banks have been asked to classify the account as NPA on an earlier date, which means, increase in provisioning requirement due to ageing factor.