RBI tightens bad loan rules to align with global norms

The Reserve Bank of India has tightened its bad loan classification rules, moving closer to global banking standards. The key change: if any single loan belonging to a borrower is classified as a Non-Performing Asset (NPA), all other loans of that borrower will automatically be tagged NPA too. Currently, banks can treat each loan separately, which can mask the true credit risk of a borrower. An NPA is a loan where the borrower has stopped making payments for a set period. Under the old approach, a borrower could default on one loan while others remained classified as healthy, understating the bank's actual exposure to that borrower. The new rule closes that gap. Banks will now have to recognize the full extent of a stressed borrower's liabilities at once, which will likely push up reported NPA levels across the system. This raises provisioning requirements for banks, meaning they must set aside more capital as a buffer against potential losses. Investors and analysts should watch for banks with large retail or MSME loan books, where borrowers often hold multiple loans, as these could see the sharpest jump in reported bad loans.