Non-Performing Assets (NPAs)
Topic in Syllabus: General Studies Paper 3: Indian Economy
According to the Economic Survey 2018-2019, the functioning of the banking sector has improved due to the decrease in the Non-performing assets (NPAs) and an increase in credit growth. The gross NPAs of the public sector banks have declined from 11.5% to 10.1%, between March 2018 and December 2018.
- To banks, loans given by it are called assets.
- Non-performing assets are those loans/advances which are in default or arrears on scheduled payments of principal or interests.
- This means that the assets are termed to be NPAs if the interests/principles are unpaid more than the specified time
When does an asset become a Non-performing Asset?
- The banks do not immediately classify their assets as NPAs.
- The banks usually allow a certain grace period before terming the NPA.
- Usually, for commercial loans, the grace period is more than 90 days. For consumer loans, it is more than 180 days and as for agricultural loans, if the interest/principal remains at overdue for more than 2 harvest seasons, it is termed as NPA.
Impacts of NPAs ?
- *Lack of confidence in the banking sector*: If there is an increase in the NPAs the banks will be unwilling to invest in new assets and ideas. This, in turn, will reduce economic progress.
- *A loss for the shareholders:* The assets of the shareholders will give little returns from the banks as the latter struggle to obtain returns from the assets.
- *Increase in the interest rate:* The rate of interest will increase. This, in turn, will lead to a decrease in the demand for the loans, a decrease in the returns for the limited assets and a decrease in economic growth and development.
- *Inflation:* The economy will face inflation because of the increase in the cost of the capital.
NPAs status in India:
- In March 2018, the commercial banks accounted for about Rs. 10.3 Trillion of NPA. This is 11.2% of the loans/advances.
- In the same period, the public sector banks (PSBs) accounted for about 86% of the NPAs.
- This indicates that there was a banking crisis in the country.
- According to the Economic Survey 2019, the stressed assets’ ratio has declined from 12.1% in March 2018 to 10.5% in December 2018.
- The NPAs have declined and the credit growth has increased.
- However, there are still concerns over the liquidity conditions of the economy. The financial flow is pressured due to a decline in the amount of equity finance obtained from the capital market and stress faced by the Non-Banking Financial Corporations
- According to the Financial Stability Report released by RBI on 25^th July this year, the bad loans as a percentage of total loans is expected to fall to 9% by March 2020.
- The gross NPAs as a percentage of total loans is at 9.3% as of March this year.
- According to the report, the gross NPA ratio of the public sector banks may reduce to 12% by March 2020.
- As for the private sector banks, the gross NPAs may fall from 3.7% to 3.2% during the same period.
- This assessment was done based on stress tests. This was done by testing the resilience of the banks against the macroeconomic shocks.
- According to the recent Crisil Report, there will be an 8% reduction of the NPAs by March 2020.
- According to the same report, the Public Sector Banks, which account for about 80% of the NPAs may see the decline of the same from 14.6% on March 2018 to 10.6% by March 2020.
Why previous rise in the NPAs ?
* According to the Economic Survey 2016-17, the cause for rising NPAs are as follows:
- *Delaying of projects:* There was difficulty in acquiring lands, environmental clearances, etc.
- *Global Financial Crisis of 2008-09* has also significantly contributed to the increase of NPAs.
- *Economic slowdown after 2011-12* has caused a negative impact on the economy.
- The *depreciation in the rupee value* has increased the rate of interest of the loans borrowed from overseas.
* *Increase in the banks’ provisions*: A provision is an amount of money put aside by the banks to cover the future liabilities. The increase in the NPAs has made them increase their provisions. This, in turn, created losses for the banks, especially for the Public Sector Banks.
* *Asset Quality Review (AQR):* The RBI, feeling that the NPAs were understated by the banks, has introduced Asset Quality Review to estimate and recognize the NPAs. This has increased the number of NPAs.
Causes for NPA decline:
* *SARFAESI Act*: Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests, 2002 played a significant role as it had legal provisions that allowed lenders to get possession of the mortgaged property within 30 days and 3 years imprisonment to the borrower if he/she does not provide the details of the assets.
* *Insolvency and Bankruptcy Code:* According to the Central Bank, under the National Company Law Tribunal, out of the 701 cases admitted, claims admitted on 21 accounts for an amount of Rs.99 Billion, the recovery has been 49 Billion. Despite the little progress, it has played a crucial role in the recovery of the bad assets.
* *Strategic Debt Restructuring (SDR): *A scheme introduced by RBI, it aims at helping banks recover their loans by taking control of their stressed companies.
* *Corporate Debt Restructuring:* Financial institutions and banks come together under this non-statutory mechanism to restructure the debts faced by the companies with financial difficulties caused either due to external or internal factors and provide support for these companies. In this scheme, the promoter who is facing debt is delinked and the ownership is changed.
* *Scheme for Sustainable Structuring of the Stressed Assets (S4A*): This was introduced to address the large stressed assets in the corporate sector. It is different from SDR as it allows existing promoter to continue within the management as a minority shareholder.
* *5/25 scheme:* For projects that require a long gestation period, a short repayment period of loans is not viable. Therefore this scheme help banks provide longer and more flexible repayment period for these loans.
* *Asset Reconstruction Company: *ARCs are a type of financial institutions that buys debtors of the banks and take effort to mend the debts by itself. The ARCs are registered under RBI and regulated under the SARFAESI Act.
* *Debt Recovery Tribunal:* DRTs were established under Recovery of Debt due to Banks and Financial Institutions Act (RDBFI), 1993. It is aimed at recovering loans of the banks and other financial institutions with their customers.
* *Mission Indradhanush:* It is the plan by the government to resolve the problems related to the Public Sector Banks. This is a 7 pronged plan that focuses on appointments, Bank Boards Bureau, capitalization, de-stressing, empowerment, the framework for accountability and government reforms.
* *Merger of banks .
* *Joint Lenders’ forum*: JLF is a forum that comprises of banks to take decisions related to stressed assets which are 100 crores or more. These groupings are formed under the guidelines of RBI.
* *Prompt Corrective Actions (PCA) Framework: *Under the PCA framework, the RBI monitors key performance indicators of the banks to prevent any future financial crisis. It is an early warning exercise undertaken by the RBI by monitoring profitability, asset quality and the capital of the banks. If any banks come under this framework, they face lending and other restrictions.
* *Government’s 4Rs Strategy*: According to the government, due to its 4Rs strategy (recognition, resolution, recapitalisation and reform strategy), there has been a significant decline of the NPAs. According to RBI data, the Gross NPAs have risen from Rs. 2.7 lakh crore in FY15 to Rs.8.95 lakh crore in FY18 mainly due to the recognition of stressed assets as bad loans in the country. The government has undertaken the 4Rs strategy to recognize the NPAs, resolving and recovering stressed assets, recapitalizing PSBs and implementing government reforms in banks and financial ecosystems.
* *Project Sashakt*: It is a 5-pronged strategy to deal with NPAs. The larger stressed assets will be dealt with by alternative investment fund (AIF) or asset management company (AMC). Bad loans up to Rs.50 crore will be managed within the bank with 90 days deadline. Bad loans between 50 crores and 500 crores will be referred by National Company Law Tribunal or enter into an inter-creditor agreement that allows the lead bank to implement a resolution plan in 180 days. For stressed assets above 500 crores, an independent AMC with the support of AIF will deal with these cases.
Though the NPAs have reduced, there are still the concerns of the liquidity flow within the economy due to low capital obtained from equity finance and also the *problem of NBFCs’ crisis. The credit growth rate of NBFCs has declined from 30% in March 2018 to 9% in March 2019. This will prove to be a liability for the economy and RBI intervention is essential to curb the crisis.
In the light of NPA problems being faced by the Indian banking sector, suggest ways to strengthen the banking sector. (200 Words)