What is NPAs and the reasons for the rise in NPA in recent years?
A Non-Performing Asset refers to a classification for loans on the books of financial institutions that are in default or are in arrears on scheduled payments of principal or interest. The assets of the banks which don’t perform (that is – don’t bring any return) are called Non Performing Assets (NPA) or bad loans.
In most cases, debt is classified as non-performing when loan payments have not been made for a period of 90 days. According to RBI, terms loans on which interest or instalment of principal remain overdue for a period of more than 90 days from the end of a particular quarter is called a Non-performing Asset. However, in terms of Agriculture / Farm Loans, the NPA is defined as under-For short duration crop agriculture loans such as paddy, Jowar, Bajra etc. if the loan (instalment / interest) is not paid for 2 crop seasons, it would be termed as a NPA. For Long Duration Crops, the above would be 1 Crop season from the due date. Non-Performing Assets which are called as NPA’s by the banking sector have become a pain for both public and private sector banks in India.
Types of NPA’s
Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets:-
Substandard assets: An assets which has remained NPA for a period less than or equal to 12 months.
Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
Loss assets: As per RBI, Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.
How grim is the situation?
The NPA problem is undoubtedly the most pressing issue in the Indian banking sector today. With Gross NPAs reaching 10.2 per cent in September 2017 and the latest Financial Stability Report estimating the same to go up to 11.1 per cent by September 2018, there appears to be little respite from the scourge of NPAs. According to the RBI’s statistical tables relating to banks in India Indian banks’ gross non-performing assets (NPAs) stood at Rs 10.25 lakh crore as on 31 March 2018. On quarter, the pile has grown by Rs 1.39 lakh crore or 16 percent from Rs 8.86 lakh crore as on 31 December 2017.The system does not have enough capital to take care of its bad loans. Economic Survey 2017-18 has also taken note of the Twin Balance sheet problem.
Reasons for the rise in NPA in recent years
- GDP slowdown -Between early 2000’s and 2008 Indian economy were in the boom phase. During this period Banks especially Public sector banks lent extensively to corporate. However, the profits of most of the corporate dwindled due to slowdown in the global economy (Lehman Crisis).
- Relaxed lending norms especially for Corporates when their financial status and credit rating is not analyzed properly.
- Five sectors Textile, aviation, mining, Infrastructure contributes to most of the NPA, since most of the loan given in these sector are by PSB’s.
- NPAs in the corporate sector are far higher than those in the priority or agriculture sector. However, even the PSL sector has contributed substantially to the NPAs.
- Banks did not conduct adequate contingency planning, especially for mitigating project risk.
- Policy Paralysis and key economic decisions were delayed which affected the macroeconomic stability
- Companies with dwindling debt repayment capacity were raising more & more debt from the system.
Impacts of NPAs
- The higher NPA’s, the weaker will be the bank’s revenue stream.
- Indian Banking sector has been facing the NPA issue due to the mismanagement in the loan distribution carried by the Public sector banks.
- As the NPAs of the banks will rise, it will bring a scarcity of funds in the Indian markets. Few banks will be willing to lend if they are not sure of the recovery of their money.
- The shareholders of the banks will lose of money as banks themselves will find it tough to survive in the market.
- The price of loans, interest rates will shoot up badly.
- It will impact the retail consumers, who will have to shell out a higher interest rate for loan.
- Finally, it will lead to lower growth and higher inflation because of the higher cost of capital.
Steps taken by RBI and Government in last few years to address NPA’s
- ‘Mission Indradhanush’ was launched to make the working of public sector bank more transparent and professional in order to curb the menace of NPA.
- Introduction of Insolvency and Bankruptcy code. Also, SARFAESI Act and DRT Act have been amended to make the recovery process more efficient and expedient.
- RBI introduced Corporate Debt Restructuring (CDR) mechanism, setting up a Joint Lenders’ Forum, 5:25 scheme, Strategic Debt Restructuring (SDR) scheme.
- Prompt corrective action (PCA) of the RBI help to mitigate financial stability risks by arresting the deterioration in the banking sector, so that further capital erosion is restricted and banks are strengthened to resume their normal operations.
- ‘Project Sashakt’– the five-pronged strategy to deal with NPAs recommended by the Sunil Mehta-led committee has been a positive move.
- Recognition of Bad loans is the first step in the direction of dealing with NPAs. Economic Survey 2016-17 proposed setting of PARA- The Public Sector Asset Rehabilitation Agency colloquially called “Bad Bank” to assume the NPA of public sector banks in India. There has been a proposal to create Public credit Registry.
Looking at the giant size of the banking industry, NPAs poses a big threat to the macro-economic stability of the Indian economy. An analysis of the present situation brings us to the point that the problem is multi-faceted and has roots in economic slowdown; deteriorating business climate in India; shortages in the legal system; and the operational shortcoming of the banks. The recommendations given by RBI & recent report of Parliamentary committee on NPAs(headed by Raghuram Rajan) are welcome steps in this regard.
Research Scholar (Jamia Millia Islamia University)