RBI now uses divergence to compel banks to improve their loan-loss ratios
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Recently,three state-run banks had reported divergence in bad loan recognition while announcing the results.
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.
In all these banks, divergence was spotted for the financial year 2017-18. Higher provisioning for divergence was one of the reasons for them to report losses for the quarter.
Further,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.
Non-Performing Assets(NPA) are loans or advances that are in default or are in arrears on scheduled payments of principal or interest,usually for a period of 90 days.Before the period of 90 days,they are called Stressed Assets.
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