Non -Performing Assets (NPA) Crisis in India

Mains Marks Booster     5th August 2023        
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Non-Performing Assets are assets that stop paying investors for a set time (NPA). India's public sector banks hold 90% of NPAs. Due to long-term operations, infrastructure generates most NPAs.

As per the recent data by RBI, the Scheduled commercial banks' net non-performing assets (NPA) ratio fell to a 10-year low of 3.9 per cent in March 2023.

Possible reasons behind NPAs-

  • Diversification of funds to unrelated business/fraud.
  • Business losses due to changes in business/regulatory environment.
  • Due to long-term operations, infrastructure generates most NPAs. Gross NPA in India is 5.9%, down from 11% two years ago.
  • The Indian economy slowed after 2011 and NPAs grew faster.
  • Unplanned expansion of corporate houses during the boom period and loan taken at low rates later being serviced at high rates→ NPAs. 
  • Due to mal-administration by the corporates, for example, wilful defaulters.
  • Severe competition in any particular market segment. For example, the Telecom sector in India.  
  • Delay in land acquisition due to social, political, cultural and environmental reasons. 

Impacts of NPAs-

  • Lenders suffer a lowering of profit margins.
  • Stress in the banking sector causes less money available to fund other projects→ negative impact on the larger national economy. 
  • Higher interest rates by the banks to maintain the profit margin.
  • As investments get stuck, → may result in unemployment.
  • Poor public sector bank health means poor shareholder returns and lower dividends for the Indian government.
  • Balance sheet syndrome→ Both the banks and the corporate sector have stressed balance sheet →halting of the investment led development process.

Government steps-  

  1. Debt Recovery Tribunals (DRTs) 1993→ To decrease the time required for settling cases. 
  2. Credit Information Bureau - A good information system is required to prevent loan falling into bad hands and therefore prevention of NPAs.
  3. SARFAESI Act 2002 – Banks/Financial Institutions can recover NPAs without court involvement by acquiring and selling secured assets in NPA accounts with an outstanding amount of Rs. 1 lakh or more.
  4. Asset Reconstruction Companies -These firms extract value from troubled loans. Before this law, lenders could only enforce security interests through courts, which took time.
  5. Corporate Debt Restructuring – 2005 It is for reducing the burden of the debts on the company by decreasing the rates paid and increasing the time the company has to pay the obligation back. 
  6. Joint Lenders Forum 2014 - It was created by the inclusion of all PSBs whose loans have become stressed. It is present so as to avoid loans to the same individual or company from different banks. 
  7. Mission Indradhanush 2015 - The Indradhanush framework for transforming PSBs is the most comprehensive reform effort since banking nationalisation in 1970 to improve PSB performance through governance reforms, accountability, recapitalization, etc.
  8. Asset Quality Review 2015 - Classify stressed assets and provision them to protect banks and early identify and prevent stressed assets.
  9. Sustainable structuring of stressed assets (S4A) 2016 - It has been formulated as an optional framework for the resolution of largely stressed accounts
  10. Insolvency and Bankruptcy code Act-2016 - This law consolidates and amends the laws on reorganisation and insolvency resolution of corporate persons, partnership firms, and individuals in a timely manner to maximise asset value and promote entrepreneurship, credit availability, and stakeholder interests.

Need of the hour-

  • Technology and data analytics to identify the early warning signals.
  • Mechanism to identify the hidden NPAs.  
  • Development of internal skills for credit assessment. 
  • Forensic audits to understand the intent of the borrower

NPA always creating trouble in financial inclusion and also reduces bank efficiency in credit system. Strong credit management and debt recovery will reduce burden of NPA.

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