Rising non-performing assets are taking a toll on public sector banks such as State of India, Punjab National Bank and Canara Bank in more ways than one -- these banks are unable to take deposits from non-government provident funds.

Norms governing investments by provident funds bar these from depositing funds in a commercial bank in case the NPAs of that bank exceed two per cent of net advances.

The Indian Banks’ Association has urged the Union finance ministry to relax the norms relating to deposits by non-government provident funds and gratuity funds in scheduled commercial banks.

Bankers said though the share of such deposits in banks’ total resource pool wasn’t substantial, a ban might lead to the impression that banks were incapable of servicing repayment obligations.

IBA said a slowdown in the recent past had led to a rise in the stressed loans of public sector banks.

Despite strong financials, many of these banks have become ineligible to take provident fund investments on their books as term deposits.

This might force investment in other banks and divert investments into instruments such as corporate bonds, which were riskier, IBA said.

As of December-end 2013, SBI had a net NPA ratio of 3.24 per cent; PNB’s level was 2.8 per cent.

While Union Bank reported a net NPA ratio of 2.26 per cent, for Canara Bank, it was 2.39 per cent.

IBA said the investment in term deposits with public sector banks might be de-linked from NPA levels from the date the government notification on investment in this regard came into force.

Though state-owned banks are facing asset quality challenges, they are financially strong and show a good repayment record.

They were solvent and responsible entities, backed by the government, IBA said.

Though the funds from non-government provident funds weren’t cheap, these offered the benefit of stability.

A senior public sector bank official involved with liabilities mobilisation said if banks were unable to take deposits from private provident funds the ties between such entities took a hit.

An advisor to private provident funds said these entities primarily faced two challenges -- safety and liquidity of money.

The executive director at a Chennai-based public sector bank said though private provident funds came under the institutional category, their amounts (individually) weren’t substantial.

As of April 18, the outstanding deposits of the Indian banking system were estimated at Rs 78,69,970 crore (Rs 78,699.7 billion), he added.

CONDITIONS BANKS HAVE TO MEET

• Continuous profitability for immediately preceeding three years
• Maintain minimum capital adequacy of nine per cent
• Have net non-performing assets of not more than two per cent
• Maintain minimum net worth of not less than Rs 200 crore (Rs 2 billion)

Image: A bank; Photograph: Reuters