The finance ministry is impressing upon the Reserve Bank of India to review its one-day default norm as it fears this could choke credit deployment and put huge provisioning burden on the public sector banks. The government in principle favours the new stressed assets resolution framework laid down by the RBI, but wants it to relax the one-day default norm to 30-days for a period of one year, a senior finance ministry official said on Thursday.

The government feels the RBI’s February 12 circular could pose “serious problem” for industry and banks, and it wants the default timeline at 30 days of payment for principle/interest not being made by the borrowers. The public sector banks may need to make more than Rs 1 lakh crore of provisions on additional stressed assets as a result of the RBI circular, the official said.

“In principle, the government favours the RBI’s new NPA framework, but some relaxation is required for at least a year so that the system is not choked. Therefore, the default should kick in from 30 days of non payment instead of one day. This should be the rule for one year after which the RBI can go back to the 1 day default rule,” the official said.

The central bank has so far not budged from its position of tough norms to deal with the non-performing assets, even as the government believes a “breathing space” for a year is required to ensure that banks and industry does not get an immediate shock. The government official said the finance ministry and the RBI will hold discussions on the matter at the “highest level” in order to resolve the issue amicably.

On Wednesday, RBI Deputy Governor NS Vishwanathan said that the new framework for resolution of distressed borrowers is required “to make sure that the excesses observed during the last credit cycle are not repeated and we don’t end up in a similar situation few years down the line”.

“The RBI believes that a focused framework for resolution of distressed borrowers which respects and enforces the sanctity of the debt contract is required… I would say certain changes are sooner brought in than later. The search for that perfect time for a long overdue reform can become a never ending exercise,” he said. “I am not sure whether the protagonists of the view that the reform was untimely know when the right time is other than that it is some time in future.”

The RBI, through a notification on February 12, has done away with all its earlier instructions dealing with resolution of stressed assets and replaced them with the revised framework for resolution of stressed assets. A key bone of contention is the RBI’s instruction to recognize loan default from day one and to initiate steps for resolution. The Indian Banking Association has earlier written to the RBI seeking relaxation.