The central bank is likely to ask banks that have outstanding loans worth Rs 1.1 billion issued against Lalita Niwas plots on their books, to provision for potential losses.

Various banks and financial institutions that issued initially issued Rs 2.41 billion in loans may have to provision possible losses if borrowers have not provided another collateral.

“If a borrower provided a plot belonging to Lalita Niwas as the only collateral for a loan, the banks will have to provision for losses related to the loan,” said Mukunda Kumar Chhetri, chief of bank supervision division at the central bank.

Loan loss provisions allow banks to deal with bad loans by using funds set aside to cover such losses, instead of taking it in their cash flows. They use their ‘loan loss reserves’, which work as an internal insurance fund, to provision for losses.

Plots of land belonging to Lalita Niawas are now categorised as ‘disputed’ after the Commission for Investigation of Abuse of Authority last week filed corruption cases against 175 individuals, including three former ministers last week, accusing them of illegally transferring ownership of the public land to various individuals. Banks cannot auction disputed plots to recover loans issued against parcels of land if their clients default.

“As many as 13 commercial banks are exposed to the borrowers indicted in the Lalita Niwas case,” said Chhetri days after the corruption watchdog ordered the central bank to take measures to protect the savings of depositors of the banks exposed to the scam. “They currently owe the banks Rs 1.1 billion to be recovered.” He said that development banks and finance companies may have also borrowed money against the controversial plots of land.

According to Chhetri, officials at the central bank are now discussing the possibility of examining each loan connected with the scam as most of the loans provided to persons involved in the Lalita Niwas land scam were ‘good loans’. “The concerned banks and the borrowers were found to have been involved in banking relations for a long time and the loans were being serviced regularly.”