This is the first time that the RBI is officially admitting that fund diversion by promoters as the major factor which pushed up NPA levels. The RBI study which covered the top 50 NPAs of 33 banks (including 27 public sector banks and top six private sector banks) as on March 31, 1997, has also blamed government policies, import duty changes, deregulation and weak credit appraisal skills among other reasons for the rise in NPAs in thebanking sector.

The outcome of the RBI study is significant as many banks, including State Bank of India, have recorded higher NPAs in the financial year ended March 1999. ``The RBI study covered only upto March 1998. Last year, more NPAs were added to the list. Now the situation has become more serious,'' said a senior banker, adding that maximum fund diversion had taken place in the 1993-96 public issue boom period when a host of companies raised funds to set up new projects. ``Many of these projects are lying unfinished. Several promoters who took loans from banks have vanished. Further, the economic downturn in the last two years also contributed to the NPAs,'' he said.

The RBI study said that the gross NPAs of the public sector banks were rising along with the net NPAs. ``The reduction of NPAs in the banking sector should be treated as a national priority item to make the Indian banking system more strong resilient and geared to meet the challenges of globalisation," the RBI paper said.

Apart fromfunds diversion by promoters, the other reasons for NPAs were listed by the RBI study are: time/cost overrun while implementing the project, external factors like raw material shortage, raw material/input price escalation, power shortage, industrial recession, excess capacity, natural calamities, business failure like product failing to capture the market, strike/strained labour relations, wrong technology, technical problems and product obsolescence, failure, non-payment/overdues in other countries, recession in other countries, externalisation problems and adverse exchange rate, wilful default, siphoning of funds, fraud, misappropriation, promoters/management disputes.

The regulator further said that NPAs were in a cross-section of industries such as ferro-alloys, man-made textiles, real estate/ civil and project related construction, pharmaceuticals, leather/good export, garment export, fertilisers and chemicals, cotton, tea/coffee, jute sugar and jewellary. Moreover, the proportion of NPAs in thepriority sector to total NPAs was 48.27 per cent as on March 31, 1996 which has gradually declined to 46.40 per cent as on March 31, 1998. The information on the composition of priority sector loans of the total NPAs was taken from 27 public sector banks at the end of the financial years 1996, 1997 and 1998.

The RBI said the higher NPAs in priority sector advances have pushed up overall proportion of NPAs of these banks by about 3 to 4 per cent. The paper has called for amendments to banking related laws for faster recovery of sticky loans. "The necessary changes in the legal framework, ie BR Act and other bank related Acts may be expedited providing therein repossession of the collateral, foreclosure and bankruptcy procedures for defaulting borrowers," the paper added. It also called for publishing of borrowers names who have settled their dues through compromise or court for a substantial amount so that other banks can deny further facilities to such borrowers for a certain period of time.

The RBI hasnot touched NPA levels of financial institutions. Leading FIs like IDBI, ICICI and IFCI had reported a steep rise in NPAs in the last two years. According to the IDBI annual report, as much as Rs 708.1 crore is stuck in iron & steel sector as NPAs. This is almost 12.1 per cent of its total NPA figure. Cotton textiles and food products were next in the IDBI list.