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Essay On NPA In Indian Banks | NPA Essay In 250+ Words Step by Step

Essay On NPA In Indian Banks | NPA Essay In 250+ Words

Hello, Friend, In this post “ Essay On NPA In Indian Banks | NPA Essay In 250+ Words “, We will read about NPA, Types of NPA, And its Solution as an Essay With In-depth Analysis.

Note:- This “ Essay On NPA In Indian Banks ” Is in 500+ Words based on deep research, It’s helpful for all students.

Let’s Start…

Essay On NPA In Indian Banks | NPA Essay

Introduction.

The common man of the country deposits his hard-earned money in banks . Banks give this accumulated capital as a loan to needy people and industrialists.

While giving a loan , it is expected that the person or industrialist should return this money to banks through EMI.

But when this loan does not come back to the bank, then it goes into the category of NPA . In simple words, it is a submerged debt of Banks .

According to banking rules , when the EMI, Principal amount or interest of a loan does not come within 90 days of the due date, it is called NPA.

That is, when a bank stops getting returns from a loan, then it becomes an NPA or bad loan for the bank.

What is NPA?

The Non-Performing Asset is a classification used by financial resources that deals with the non-repayment of debt . When a borrower fails to pay interest or principal till 90 days, the loan given to him is treated as NPA, and Banks show such loans in the NPA column of their balance sheet.

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Three Main Types of NPAs: –

Substandard asset, doubtful asset.

When a loan remains NPA for 12 months or less, it is called Sub-Standard Asset . In such a loan, the total assets or collateral of the borrower is not so much that the entire dues can be recovered from it.

When a debt remains subordinated for 12 months, it falls into the category of Doubtful Asset . The possibility of recovery of the entire amount of such loan is very less.

When the bank assumes that the possibility of recovery of any of its debts is negligible or is over, then it is called a Loss Asset .

How to Overcome the Problem of NPA?

The government is constantly making efforts to resolve the NPA cases in public sector banks.

There are actually two types of borrowers under the NPA . First, those who are unable to pay arrears due to domestic and global recession or other reasons.

And others who do not want to intentionally repay the loans of banks . The government has taken measures to deal with the defaulters of both categories.

Due to the economic downturn, the government has made several schemes for the loans which are not being paid.

Similarly, the central government has made available Rs 70000 crore capital to government banks in 3 years and if required, more capital will be made available.

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To make the recovery proceedings more effective, the “ SARFAESI Act ” and Debt Recovery Tribunal Act have been amended.

To bring transparency, banks have been asked to issue a list of borrowers whose debts have been waived.

Stringent action should be taken against the traitors who did not return the loan intentionally so that such incidents do not happen in the future.

In order to help the farmers, their debts have been restructured and the debt of farmers has also been waived in some states.

In addition, the Bankruptcy Code 2016 has been introduced. With its implementation, unnecessary delays in the recovery of loans and losses arising from it will be avoided.

In the event of failure to repay the loan, the company will be given an opportunity to repay its loan within a certain time or declare itself bankrupt. Similarly, if anyone is found guilty of debt , then there is a provision of punishment of 5 years .

Conclusion (Essay On NPA In Indian Banks)

Banks are the mainstay of any economy. Banks are not only responsible for the steady and balanced flow of capital in the market, but they also have the responsibility of the correct operation and management of the system .

If the banking system does not discharge its duties with full devotion, then its direct effect is visible on the credit of the bank as well as the economy of the country .

It is clear from all these things that, if no hard decision is taken in respect of these problems in time, it will not be easy to emerge from its effects.

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Essay on NPA in Indian Banks

Learn how to write an essay on NPA in Indian banks in 250 or 300 words. NPA essay is asked in 4, 5, 6, 7, 8, 9, 10, 11 and 12 class. Students should now how to write essay on NPA.

The loans provided by the banks to the borrowers are known as assets of the bank. In case, if the borrower is not giving the interest or the principal or both the elements of a loan to the bank, then such a loan will be regarded as a Non-Performing Asset (NPA). Therefore, any asset which does not provide any return to the investors for a particular period of time is called the NPA. This particular period can be of 90 days however it may vary for different countries.

Reasons behind NPAs –

A borrower may suffer from business loss due to amendments in the regulations, national or global financial crisis which leads to reduced profit margins and consequently weakening the balance sheet and leading to NPA. Also, after the slowdown of the economy due to various reasons, NPAs took a greater upsurge. Deceleration of a particular industrial sector, expansion of corporate houses in the boom period when the loan was taken at lower interest rates but later the rates became high that resulted in NPAs. Due to poor administration by the governmental bodies and policy paralysis, which slow down the timeline and project speed and thus leading to NPAs. There are natural reasons such as floods, droughts, or tsunamis which may lead to NPAs.

Impact of NPAs –

Due to NPAs, banking sector lacks in money which would have been used to fund and start other important projects. This ultimately affects the national economy of the country. Banks start providing loans at a higher interest rate so as to maintain their profit margin. They may also redirect the funds from good projects to start the bad ones.

How to deal with NPAs –

Technology should be used effectively to get the early signals. A proper mechanism should be used by the government to identify the unseen NPAs. Banks should resort to forensic audits to know the intention of the borrower. There are many other steps taken by the government to resolve this unending issue however, it is a long way to eradicate this issue out of the country.

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Essay on Non-performing Assets (NPA) | NPA Essay | Essay on NPA

Npa essay | essay on non-performing assets | essay on npa.

Essay on NPA or Non-performing Assets is one of the most important essay topics for banking exams as well as other competitive exams. Here we have written essay on npa or essay on non-performing assets which is most important for IBPS PO Mains Exam descriptive paper , SBI PO Mains Descriptive Paper and other banking exams. Lets see essay on NPA .

Essay on Non Performing Assets (NPA)

Banks or financial institutions provide loan to its customer and in return they receive interest. Generally, loan is returned by customer in fixed monthly installment called EMI. EMI or Equated Monthly Installment is a part of the equally divided monthly outgoes to clear off an outstanding loan within stipulated time. It is a combination of some part principal and accumulated interest during the month. When customer does not pays EMI on the time, account shows overdue and if he is unable to pay the EMI for a specified period of time generally 90 days the loan is specified as NPA .

What is NPA or non-performing assets?

In simple terms, a loan or advance for which the principal or interest payment remained overdue for specified period generally 90 days is known as non-performing assets (NPA) . Further bank classifies NPAs into three categories:

Sub-standard Assets

Doubtful Assets

Loss assets, sub-standard assets .

As per RBI norms, a loan or advance which remained NPA for a period of less than or equal to 12 months is classified as Sub-standard Assets

A loan or advance which remained NPA for a period exceeding 12 months is classified as doubtful assets.

When a loss has been identified by the bank or auditors or Co-operation Department or by RBI inspection but the amount has not been written off, wholly or partially, the assets would be classified as Loss Assets.

Growing non-performing assets (NPA) are not good for lender institutions as well as economy of the country. Therefore, while sanctioning loan, banks check the loan payment capability of borrowers so that NPA can be minimized.

Hope you liked this essay on Non-performing assets or npa essay and it helped you in your exam preparation.

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NPA Essay | Essay on NPA for Students and Children in English

February 13, 2024 by Prasanna

NPA Essay: NPA stands for Non-Performing Assets. Categorization of loans or advances that are in default or arrears is known as non-performing assets. When the borrower misses the principal or pays the interest payments lately, then the loan belongs to arrear.

And, when the lender considers the agreement of loan to be broken or when the debtor is incapable of meeting his obligations, then the loan is in default. Non-performing assets is a very important term in the banking system.

You can also find more Essay Writing articles on events, persons, sports, technology and many more.

Long and Short Essays on NPA for Students and Kids in English

We are providing students with samples of essay on a long essay of 500 words and a short essay of 150 words on the topic NPA for reference.

Long Essay on NPA 500 Words in English

Long Essay on NPA is usually given to classes 7, 8, 9, and 10.

A lender always makes an agreement of debt with a borrower. When the borrower doesn’t return the money with interest after a long period, then the lender forces the borrower to liquidate any assets that were pledged as part of the agreement of debt. The lender then can write-off that asset as a bad debt and then sell it to a collection agency at a discount.

In most of the cases, when any loan payment is not made for 90 days, then the debt is classified as non-performing. Ninety days is a standard period, whereas, the elapsed time amount may vary depending on the terms and conditions of the loan of each individual. At any point during the time of maturity of the loan, it can be classified as a non-performing asset.

An example will make the concept of non-performing assets clear. Let us assume, a company with a loan of INR 1 crore with interests of INR 50 thousand per month, fails to pay for three consecutive months. The lender, i.e., the person or any bank or company who lent that company can categorize the loan as non-performing to meet the regulatory requirements. The lender can also categorize the loan as non-performing if the company pays all the interests but fails to return the principal at maturity.

Carrying non-performing assets are also referred to as non-performing loans. On the balance sheet, the non-performing loans put extra pressure on the lender. If the interest or principal is not paid, then the cash flow of the lender will reduce significantly. Reduction of the cash flow will cause disruption in budget and thus decrease in earnings.

There are different types of non-performing assets. The most common type of non-performing assets is term loans. Though, there are few other types of NPA as well. “Overdraft and cash credit accounts” is a type of NPA that is left out-of-order for more than three months. Regular payment is overdue for more than three months on any other type of account.

There is a process of recording the non-performing assets. Banks classify the non-performing assets into three categories according to the duration of the assets’ non-performance. These three categories are sub-standard assets, doubtful assets and loss assets.

As an asset that has been non-performing for less than a year is classified as a sub-standard asset. An asset that has been in a state of non-performing for more than a year is classified as a doubtful asset. And, loans with losses that are identified by the auditor, bank or inspector that need to be fully written-off are called loss assets.

Lenders face minimal and sometimes huge losses due to non-performing assets. They have just four options to cover up all the losses or some of the losses. The lenders may take pro-active steps when companies struggle to return their debt, to reconstruct the loans to keep the maintenance of cash flow. In this way, they can avoid the classification of loans as non-performing assets altogether.

Short Essay on NPA 150 Words in English

Short Essay on NPA is usually given to classes 1, 2, 3, 4, 5, and 6.

NPA is the abbreviated form of Non-Performing Assets. NPA is a very well known term in commercial fields. The lists of non-performing assets are found on a bank or any other financial institution’s balance sheet. When the borrower misses or pays the interest payments lately, then the loan belongs to arrear.

10 Lines on NPA in English

NPA is the abbreviated form of Non-Performing Assets.
When any loan payment is not made for 90 days, then the debt is classified as non-performing.
The lender then can write-off that asset as a bad debt and then sell it to a collection agency at a discount.
The lender can categorize the loan as non-performing if the company pays all the interests but fails to return the principal at maturity.
Carrying non-performing assets are also referred to as non-performing loans.
The most common type of non-performing assets is term loans.
Three categories of NPA are sub-standard assets, doubtful assets and loss assets.
A non-performing asset for less than a year is classified as a sub-standard asset.
A non-performing asset for more than a year is classified as a doubtful asset.
Lenders have just four options to cover up all the losses or some of the losses.

FAQ’s on NPA Essay

Question 1. What is the full form of NPA?

Answer: The full form of NPA is Non-Performing Assets.

Question 2. How many categories of NPA are there?

Answer: There are three categories of NPA.

Question 3. What is a sub-standard asset?

Answer: An essay that has been non-performing for less than a year is called a sub-standard asset.

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Non-Performing Assets (NPA): How serious is India’s bad loan problem?

Last updated on October 10, 2023 by ClearIAS Team

In the best interest of our readers, we have come up with a comprehensive post on NPAs, in which analyze the entire issue in detail.

We will also list out the steps taken by the Government and RBI to counter the situation.

Also read: Infrastructure and Economic Development

Table of Contents

What is a Non-Performing Asset (NPA)?

You may note that for a bank, the loans given by the bank is considered as its assets. So if the principle or the interest or both the components of a loan is not being serviced to the lender (bank), then it would be considered as a Non-Performing Asset (NPA).
Any asset which stops giving returns to its investors for a specified period of time is known as Non-Performing Asset (NPA).
Generally, that specified period of time is 90 days in most of the countries and across the various lending institutions. However, it is not a thumb rule and it may vary with the terms and conditions agreed upon by the financial institution and the borrower.

An example of NPA:

Suppose the State Bank of India (SBI) gives a loan of Rs. 10 crores to a company (Eg: Kingfisher Airlines). Consider that they agreed upon for an interest rate of say 10% per annum. Now suppose that initially everything was good and the market forces were working in support to the airline industry, therefore, Kingfisher was able to service the interest amount. Later, due to administrative, technical or corporate reasons suppose the company is not able to pay the interest rates for 90 days. In that case, a loan given to the Kingfisher Airlines is a good case for the consideration as NPA.

NPAs definition by Reserve Bank of India (RBI)

An asset, including a leased asset, becomes nonperforming when it ceases to generate income for the bank.

Technical definition by RBI on NPA on different cases

NPA is a loan or an advance where…

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Interest and/ or instalment of principal remain overdue for a period of more than 90 day s in respect of a term loan.
The account remains ‘ out of orde r’ in respect of an Overdraft/Cash Credit (OD/CC).
The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.
The instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops.
The instalment of principal or interest thereon remains overdue for one crop season for long duration crops .
The amount of liquidity facility remains outstanding for more than 90 days , in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006.
In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.

Categories of Non-Performing Assets (NPAs)

Based upon the period to which a loan has remained as NPA, it is classified into 3 types:

How serious is India’s NPA issue?

More than Rs. 7 lakh crore worth loans are classified as Non-Performing Loans in India. This is a huge amount.
The figure roughly translates to near 10% of all loans given.
This means that about 10% of loans are never paid back, resulting in substantial loss of money to the banks.
When restructured and unrecognised assets are added the total stress would be 15-20% of total loans.
NPA crisis in India is set to worsen.
Restructuring norms are being misused.
This bad performance is not a good sign and can result in crashing of banks as happened in the sub-prime crisis of 2008 in the United States of America.
Also, the NPA problem in India is worst when comparing other emerging economies in BRICS.

Ratios of NPA to Total Gross Loans, countries wise data.

What can be the possible reasons for NPAs?

Diversification of funds to unrelated business/fraud.
Lapses due to diligence.
Busines losses due to changes in business/regulatory environment.
Lack of morale, particularly after government schemes which had written off loans.
Global, regional or national financial crisis which results in erosion of margins and profits of companies, therefore, stressing their balance sheet which finally results into non-servicing of interest and loan payments. (For example, the 2008 global financial crisis).
The general slowdown of entire economy for example after 2011 there was a slowdown in the Indian economy which resulted in the faster growth of NPAs.
The slowdown in a specific industrial segment , therefore, companies in that area bear the heat and some may become NPAs.
Unplanned expansion of corporate houses during the boom period and loan taken at low rates later being serviced at high rates, therefore, resulting in NPAs.
Due to mal-administration by the corporates, for example, willful defaulters.
Due to misgovernance and policy paralysis which hampers the timeline and speed of projects, therefore, loans become NPAs. For example the Infrastructure Sector.
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.
A bad lending practice which is a non-transparent way of giving loans.
Due to natural reasons such as floods, droughts, disease outbreak, earthquakes, tsunami etc.
Cheap import due to dumping leads to business loss of domestic companies. For example the Steel sector in India.

What is the impact of NPAs?

Lenders suffer a lowering of profit margins.
Stress in banking sector causes less money available to fund other projects, therefore, negative impact on the larger national economy.
Higher interest rates by the banks to maintain the profit margin.
Redirecting funds from the good projects to the bad ones.
As investments got stuck, it may result in it may result in unemployment.
In the case of public sector banks, the bad health of banks means a bad return for a shareholder which means that the government of India gets less money as a dividend. Therefore it may impact easy deployment of money for social and infrastructure development and results in social and political cost .
Investors do not get rightful returns.
Balance sheet syndrome of Indian characteristics that is both the banks and the corporate sector have stressed balance sheet and causes halting of the investment-led development process.
NPAs related cases add more pressure to already pending cases with the judiciary .

What are the various steps taken to tackle NPAs?

NPAs story is not new in India and there have been several steps taken by the GOI on legal, financial, policy level reforms. In the year 1991, Narsimham committee recommended many reforms to tackle NPAs. Some of them were implemented.

The Debt Recovery Tribunals (DRTs) – 1993

To decrease the time required for settling cases. They are governed by the provisions of the Recovery of Debt Due to Banks and Financial Institutions Act, 1993. However, their number is not sufficient therefore they also suffer from time lag and cases are pending for more than 2-3 years in many areas.

Credit Information Bureau – 2000

A good information system is required to prevent loan falling into bad hands and therefore prevention of NPAs. It helps banks by maintaining and sharing data of individual defaulters and willful defaulters.

Lok Adalats – 2001

They are helpful in tackling and recovery of small loans however they are limited up to 5 lakh rupees loans only by the RBI guidelines issued in 2001. They are positive in the sense that they avoid more cases into the legal system.

Compromise Settlement – 2001

It provides a simple mechanism for recovery of NPA for the advances below Rs. 10 Crores. It covers lawsuits with courts and DRTs (Debt Recovery Tribunals) however willful default and fraud cases are excluded.

SARFAESI Act – 2002

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 – The Act permits Banks / Financial Institutions to recover their NPAs without the involvement of the Court, through acquiring and disposing of the secured assets in NPA accounts with an outstanding amount of Rs. 1 lakh and above. The banks have to first issue a notice. Then, on the borrower’s failure to repay, they can:

Take ownership of security and/or
Control over the management of the borrowing concern.
Appoint a person to manage the concern.

Further, this act has been amended last year to make its enforcement faster.

ARC (Asset Reconstruction Companies)

The RBI gave license to 14 new ARCs recently after the amendment of the SARFAESI Act of 2002. These companies are created to unlock value from stressed loans. Before this law came, lenders could enforce their security interests only through courts, which was a time-consuming process.

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.

5:25 rule – 2014

Also known as , Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries . It was proposed to maintain the cash flow of such companies since the project timeline is long and they do not get the money back into their books for a long time, therefore, the requirement of loans at every 5-7 years and thus refinancing for long term projects.

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 loan to the same individual or company from different banks. It is formulated to prevent the instances where one person takes a loan from one bank to give a loan of the other bank.

Mission Indradhanush – 2015

The Indradhanush framework for transforming the PSBs represents the most comprehensive reform effort undertaken since banking nationalization in the year 1970 to revamp the Public Sector Banks (PSBs) and improve their overall performance by ABCDEFG.

B-Bank Board Bureau : The BBB will be a body of eminent professionals and officials, which will replace the Appointments Board for the appointment of Whole-time Directors as well as non-Executive Chairman of PSBs

C-Capitalization: As per finance ministry, the capital requirement of extra capital for the next four years up to FY 2019 is likely to be about Rs.1,80,000 crore out of which 70000 crores will be provided by the GOI and the rest PSBs will have to raise from the market.

D-DEstressing: PSBs and strengthening risk control measures and NPAs disclosure.

E-Employment: GOI has said there will be no interference from Government and Banks are encouraged to take independent decisions keeping in mind the commercial the organizational interests.

F-Framework of Accountability: New KPI(key performance indicators) which would be linked with performance and also the consideration of ESOPs for top management PSBs.

G-Governance Reforms : For Example, Gyan Sangam, a conclave of PSBs and financial institutions. Bank board Bureau for transparent and meritorious appointments in PSBs.

Strategic debt restructuring (SDR) – 2015

Under this scheme banks who have given loans to a corporate borrower gets the right to convert the complete or part of their loans into equity shares in the loan taken company. Its basic purpose is to ensure that more stake of promoters in reviving stressed accounts and providing banks with enhanced capabilities for initiating a change of ownership in appropriate cases.

Asset Quality Review – 2015

Classify stressed assets and provisioning for them so as the secure the future of the banks and further early identification of the assets and prevent them from becoming stressed by appropriate action.

Sustainable structuring of stressed assets (S4A) – 2016

It has been formulated as an optional framework for the resolution of largely stressed accounts . It involves the determination of sustainable debt level for a stressed borrower and bifurcation of the outstanding debt into sustainable debt and equity/quasi-equity instruments which are expected to provide upside to the lenders when the borrower turns around.

Insolvency and Bankruptcy code Act-2016

It has been formulated to tackle the Chakravyuaha Challenge ( Economic Survey ) of the exit problem in India. The aim of this law is to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner and for maximization of value of assets of such persons and matters connected therewith or incidental thereto.

Pubic ARC vs. Private ARC – 2017

This debate is recently in the news which is about the idea of a Public Asset Reconstruction Companies (ARC) fully funded and administered by the government as mooted by this year’s Economic Survey Vs. the private ARC as advocated by the deputy governor of RBI Mr. Viral Acharya. Economic survey calls it as PARA (Public Asset Rehabilitation Agency) and the recommendation is based on a similar agency being used during the East Asian crisis of 1997 which was a success.

Bad Banks – 2017

Economic survey 16-17 , also talks about the formation of a bad bank which will take all the stressed loans and it will tackle it according to flexible rules and mechanism. It will ease the balance sheet of PSBs giving them the space to fund new projects and continue the funding of development projects.

The need of the hour to tackle NPAs is some urgent remedial measures. This should include:

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.

Article by: Nishant Raj. The author is an IIT Kharagpur Alumnus.

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Reader Interactions

June 11, 2017 at 5:13 am

Very Deeply Elaborated with Details

January 30, 2018 at 8:24 pm

This is “THE BASE” of Current economy, for technical background people.

June 29, 2018 at 1:13 am

In mission indradhnush It’s E for Empowerment not employment… Correct me if I am wrong

November 30, 2018 at 6:09 pm

January 2, 2019 at 11:08 am

Please seen that pic frnd it has represented the correct form..

February 27, 2020 at 10:25 am

Strict action should be taken against froud companies and hereafter loan amount should be deducted automatically from company account.Company and related person should not be allowed to open an account in other bank.Cash tranziction should be not be allowed.

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Non Performing Assets (NPAs) and its impact on Indian economy

Current Affairs Classes Pre cum Mains 2025, Batch Starts: 11th September 2024 Click Here for more information

The Centre on Tuesday unveiled an ambitious plan to infuse Rs. 2.11 lakh crore capital over the next two years into public sector banks (PSBs)saddled with high, non-performing assets and facing the prospect of having to take haircuts on loans stuck in insolvency proceedings.

Introduction:

The move is vital for the slowing economy, as private investments remain elusive in the face of the “twin-balance sheet problem” afflicting corporate India and public sector banks reflected in slow bank credit growth.
The Government has decided to take a massive step to capitalise PSBs in a front-loaded manner, to support credit growth and job creation.
The government’s capitalisation package for public sector banks will provide a strong booster dose of relief for the capital starved public sector banks.

What are Non-Performing Assets?

A loan or lease that is not meeting its stated principal and interest payments.
A loan is an asset for a bank as the interest payments and the repayment of the principal amount create a stream of cash flows.
Banks usually treat assets as non-performing if they are not serviced for some time. If payment has not been made as of its due date then the loan gets classified as past due.
Once a payment becomes really late the loan gets classified as non-performing. A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.

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.”

What are the reasons for growth?

Governance Issues:

Diversion of funds by companies for purposes other than for which loans were taken.
Due diligence not done in initial disbursement of loans.
Inefficiencies in post disbursement monitoring of the problem.
Restructuring of loans done by banks earlier to avoid provisioning. Post crackdown by RBI, banks are forced to clear their asset books which has led to sudden spurt in NPAs
During the time of economic boom, overt optimism shown by corporates was taken on face value by banks and adequate background check was not done in advancing loan
In the absence of adequate governance mechanism, double leveraging by corporates, as pointed out by RBI’s Financial Stability Report.

Economic Reasons

Economic downturn seen since 2008 has been a reason for increasing bad loan
Global demand is still low due to which exports across all sector has shown a declining trend for a long
In the case of sectors like electricity, the poor financial condition of most SEBs is the problem; in areas like steel, the collapse in global prices suggests that a lot more loans will get stressed in the months ahead
Economic Survey 2015 mentioned over leveraging by corporate as one of the reasons behind rising bad loans
Another factor that can contribute to the low level of expertise in many big public sector banks is the constant rotation of duties among officers and the apparent lack of training in lending principles for the loan officers
Poor recovery and use of coercive techniques by banks in recovering loans

Political reasons

Policy Paralysis seen during the previous government affected several PPP projects and key economic decisions were delayed which affected the macroeconomic stability leading to poorer corporate performance.
Crony capitalism is also to be blamed.
Under political pressure banks are compelled to provide loans for certain sectors which are mostly stressed

Problems of Exit

In the absence of a proper bankruptcy law, corporate faced exit barriers which led to piling up of bad loans
Corporates often take the legal route which is time consuming leading to problems for the banks

Impacts of NPAs:

The higher is the amount of non-performing assets (NPA) 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.
This will lead to a crisis situation in the market.
The price of loans, interest rates will shoot up badly. Shooting of interest rates will directly impact the investors who wish to take loans for setting up infrastructural, industrial projects etc.
It will also impact the retail consumers, who will have to shell out a higher interest rate for a loan.
All these factors hurt the overall demand in the Indian economy.
Finally, it will lead to lower growth and higher inflation because of the higher cost of capital.

Current developments on NPA:

According to the Reserve Bank of India’s latest “ Financial Stability Report”, Gross Non-Performing assets (NPAs) rose from 9.2% in September 2016 to 9.6% in March 2017.
Stress tests conducted by the RBI indicate that this number could rise to 10.2% under the baseline scenario.
Return on assets is negative.
The net non-performing advances (NNPA) ratio marginally increased to 5.5% in March 2017 from 5.4% in September 2016.
The RBI in its Financial Stability Report (FSR) highlighted that stressed advances ratio declined from 12.3 % to 12% due to fall in restructured standard advances.

Recent NPA issues in India:

The Internal advisory committee (IAC) of the Reserve Bank of India (RBI) had recently identified 12 accounts for insolvency proceedings with each of them having over Rs 5,000 crore of outstanding loans, accounting for 25 percent of total NPAs of banks.
According to RBI, these 12 accounts would qualify for immediate reference under the Insolvency and Bankruptcy Code (IBC).
The total amount for gross non-performing assets (NPA) as on March was estimated to 11 Lakh crore
Any missed installment not paid to the bank until the due date is a bad loan. If this further extends beyond 90 days, it is termed as Non-performing asset or (NPA).

Steps proposed by RBI:

Restructured standard account provisioning has been increased to 5% making it easier for banks to go for restructuring. On the flip side, this has the potential to enhance tendency of ever greening of loans.
RBI has directed banks to give loans by looking at CIBIL score and is encouraging banks to start sharing information amongst themselves.
RBI has directed banks to report to Central Repository of Information on Large Credit (CRILC) when principle/interest payment not paid between 61-90 days
RBI has asked banks to conduct sector wise/activity wise analysis of NPA
SEBI has eased norms for banks to convert debt of distressed borrowers into equity

5/25 scheme

For existing and new projects greater than 500 crores and also for existing projects which have been classified as bad debt or stressed asset, bank can provide longer amortization periods of 25 years with the option of restructuring loans every 5 or 7 year
The advantage of this scheme is that it provides for longer lending period with inbuilt flexibility. Shorter lending periods leads to companies stretching their balance sheet to pay back loan
From bank’s point of view it is helpful as freshly restructured asset is considered as bad debt and requires 15% provisioning by banks against such loans leading to erosion of profitability for banks

Strategic Debt Restructuring Scheme

Management change in company getting restructured
Sale of non core assets in case company has diversified into sectors other than for which loans were guaranteed
Decision by JLF on debt restructuring by a majority of 75% by value and 60% by number
On the positive side, willful defaulters are dissuaded as they fear the loss of their company

Issues with the scheme:

Banks do not have expertise of managing companies
The Joint Lenders Forum mechanism has an inherent conflict between large banks and small lenders. The large banks have huge exposure and thus they want to restructure the loans so as to avoid provisioning. The smaller lenders fear arm twisting by large banks. Since they have less exposure they are unwilling to throw good money after bad and prefer to sell their exposure to ARCs as HDFC did in case of EssarSte

Assessment of SDR

SDR is not performing too well. Of the 21 cases in which SDR has been invoked, only 4 have been closed. The problems are:
Difficulty in finding buyers
Buyers demanding prices that are unacceptable
Creditor’s concern over their source of funding and credibility
In the absence of potential buyers, bank wouldn’t want to hold onto these assets indefinitely. Unless and until a mechanism is devised which charts out a course of what to do thereafter, it doesn’t make much sense to do this conversion
Disagreement over valuations
Banks not willing to take severe haircuts
Problem particularly acute in the infra sector where the valuations have drastically declined over the past 2-3 years
To help restore credit flow to stressed sectors such as steel etc as credit lending condition have been eased in the scheme
Banks can rework their stressed accounts under the oversight of an external agency. This means greater transparency in functioning of banks. This is a provision of the scheme itself. Banks had earlier complained of activism by investigative agencies in probing bad debt which made it difficult for them to go for restructuring in even genuine cases
This scheme would not only strengthen the lenders’ ability to deal with stressed assets, but would also put real assets back on track, benefitting both banks and the promoters of troubled entities.

Other suggestions:

Banks need to be more conventional in yielding loans to sectors that have a history of being found as contributors in NPAs.
The loan sanctioning process of banks needs to be harsher and well beyond the conventional practices of analysis of financial statements and history of promoters.
A suitable agenda to attract and reassure quality professionals to join the discipline of insolvency professionals is vital.
Any plan to alleviate the current scenario especially relating to the Debt recovery tribunals must be given urgency, to ease the burden on NCLT
If the public sector has to compete in the fierce financial markets, they have to create and nurture a good cadre of officers in various disciplines.
As per the RBI directive, banks will now have to agree to a common approach forrestructuring or recovery of each non-performing loan (NPL).
The common approach will be the one adopted by the lead bank, along with a few more banks so as to meet the thresholds of 60% of lenders by value and 50% by number.
This approach assumes that the interests of all banks need to be aligned with or subsumed within the interest of the lead bank.
There is an urgent need to develop specialized skills in the area of appraisal, monitoring and recovery to ensure the quality of credit portfolio.
Banks should be equipped with latest credit risk management techniques to protect the bank funds and minimize insolvency issues.
Banks should explore the possibilities to develop credit derivative markets to avoid these risks.
Timely follow up is the key to keep the quality of assets intact and enables the bank to recover the interest/installments in time.
Selection of right borrowers , viable economic activity,adequate finance and timely disbursement, end use of funds and timely recovery of loans should be the focus areas so as to prevent or minimize the incidence of fresh NPAs.

What is Bankruptcy code?

The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India that administers the insolvency proceedings and establishes a framework for insolvency resolution processes effectively.
The Insolvency and Bankruptcy Code was introduced by (FM) ArunJailtely in December’15 and was subsequently passed by the LokSabha on 5 May’16. However the act was finally approbated on 28 May 2016.

Key Features:

The Code outlines separate insolvency resolution processes for individuals and companies
The Code acts as a regulator by establishing the Insolvency and Bankruptcy Board of India .
The board oversees the insolvency proceedings in the country and regulates the entities registered below it. The Board has 10 members, which includes representatives from the Ministries of Finance and Law , and the Reserve Bank of India.
The insolvency process is accomplished by licensed professionals. These professionals also control the assets of the debtor during the insolvency procedure
The Code proposes two distinct tribunals to supervise the process of insolvency resolution, for individuals and companies:

How NPA are different from stressed assets?

Stressed assets:

A stressed asset is an indicator of the health of the banking system.
It is a combination of NPA, Restructured loans and Written off assets.
Assets of the banking system comprises of loans given and investment in bonds made by banks.
Quality of the asset indicates how much of the loans taken by the borrowers are repaid in the form of interests and principal.

Restructured loans:

These are assets which got an extended repayment period, reduced interest rate, converting a part of the loan into equity, providing additional financing.
Under restructuring a bad loan is modified as a new loan.
This is because a restructured loan was a past NPA or it has been modified into a new loan.
Corporate Debt Restructuring Mechanism (CDM) allows restructuring of loans.

Written off Assets:

These are those bank or lender doesn’t count the money borrower owes to it.
The financial statement of the bank will indicate that the written off loans are compensated through some other way.
The ratio of stressed assets to gross advances of the Indian Banking System is increasing from 2013 onwards.
It has risen from around 6 per cent at end of March 2011 to 11.1 per cent by 2015.

Government initiatives to tackle NPAs:

Promulgation of Banking Regulation (Amendment) Ordinance : It helps in the following ways:
It empowers the RBI to direct Banks to initiate insolvency resolution, wherever such need arises.
It also give advise to baking agencies on ways of tackling with its stressed asset problems.
It aims to check this menace in a time bound manner and helps in timely recovery of the stressed assets.
Incorporation of SARFAESI ACT: The Securitization and Reconstruction of Financial assets and Enforcement of Security Interest Act 2002 empowers the banking systems to auction residential or commercial properties (except agricultural land) to recover their loans.
Debt Recovery Acts: These laws established debt recovery tribunals with the power to recover debts of Banks and Financial Institutions.
Concept of Bad Banks: In this concept the banking institutions sell their bad loans to an intermediary and thus they write off their bad loan and intermediary has to recover the loan from the defaulter.
Mediation for loan recovery: This concept was introduced so that genuine defaulter, who are unable to pay off their loans, but are not able to put forward their situations with the banking authorities, hire a mediator, who discusses this with the banking officer and come to a solution.
Strategic Debt Restructuring (SDR): Creditors could take over the assets of the firms and sell them to new owners.
Sustainable Structuring of Stressed Assets (S4A): An independent agency hired by the banks will decide on how much of the stressed debt of a company is sustainable
The government recently passed an ordinance to amend certain sections of the Banking Regulation Act, 1949: This allow the banking companies to resolve the issue related to stressed assets by initiating the insolvency proceedings whenever required. This is in addition to the recently promulgated Insolvency and Bankruptcy Code, 2016 which provides for time bound resolutions of stressed assets.
Government promulgated the Banking Regulation(Amendment) Ordinance, 2017 with the following features:
It was passed to deal with stressed assets, particularly those in consortium or multiple banking arrangements.
It authorize the RBI to direct banking companies to resolve the issue related to specific stressed assets, by initiating insolvency resolution process wherever required.

Public asset reconstruction agency(PARA):

The Public Sector Asset Rehabilitation Agency (PARA) colloquially called “ Bad Bank ” is a proposed agency to assume the Non-Performing Assets (NPA) of public sector banks in India and to deal with the recovery of the bad loans. This agency has been proposed in Economic Survey 2016-17.

How would a PARA actually work?

It could solve the coordination problem since debts would be centralised in one agency.
It could be set up with proper incentives by giving it an explicit mandate to maximise recoveries within a defined time.
It would separate the loan resolution process from concerns about bank capital.
It would purchase specified loans from banks and then work them out, depending on professional assessments of the value-maximising strategy.
Once the loans are off the books of the public sector banks, the government would recapitalise them, thereby restoring them to financial health.
Similarly, once the financial viability of the over-indebted enterprises is restored, they will be able to focus on their operations, rather than their finances.

Conclusion:

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NPA in India and its impact on Indian Economy | UPSC – IAS

Reasons for the Rise in NPA levels | UPSC – IAS

2004-05 to 2008-09 – In that period, commercial credit (or what is called ‘non-food credit’) doubled. It was a period in which the world economy as well as the Indian economy were booming. Indian firms borrowed furiously in order to avail of the growth opportunities they saw coming.

Most of the investment went into infrastructure and related areas — telecom, power, roads, aviation, steel.
Businessmen were overcome with exuberance and they believed, as many others did, that India had entered an era of 9% growth.
From 2000-2008, the Indian economy was in a boom phase and banks, especially public sector banks, started lending extensively to companies.
However, with the financial crisis in 2008-09, corporate profits decreased and the Government banned mining projects. The situation became serious with the substantial delay in environmental permits, affecting the infrastructure sector – power, iron, and steel – and resulting in volatility in prices of raw materials and a shortage of supply.
Another reason is the relaxed lending norms adopted by banks, especially to the big corporate houses, foregoing analysis of their financials and their credit ratings.

Recent Developments and Ways to Tackle NPA | UPSC – IAS

The Debt Recovery Tribunals (DRTs) – To decrease the time required for settling cases. They are governed by the provisions of the Recovery of Debt Due to Banks and Financial Institutions Act, 1993. However, their number is not sufficient therefore they also suffer from time lag and cases are pending for more than 2-3 years in many areas. The original aim of the Debts Recovery Tribunal was to receive claim applications from Banks and Financial Institutions against their defaulting borrowers
Using unclaimed deposits – Similar to provisions for unclaimed dividends, the government may also create a provision and transfer unclaimed deposits to its account. These funds in return can be transferred to banks as capital.
Monetization of assets held by Banks – In this case, banks with retail franchisees should create value by auctioning a bank assurance association rather than running it themselves as an insurance company. The current set-up blocks capital inflows and doesn’t generate much wealth for the owners.
Make Cash Reserve Ratio (CRR) attractive – At present, the RBI asks Indian banks to maintain a certain limit on CRR on which the RBI doesn’t pay interest and hence, banks lose out a lot on interest earnings. If the CRR is made more financially rewarding for banks, it can reduce capital requirements.
Refinancing from the Central Bank – The US Federal Reserve spent $700 billion to purchase stressed assets in 2008-09 under the “Troubled Asset Relief Program.” Indian banks can adopt a similar arrangement by involving the RBI directly or through the creation of a Special Purpose Vehicle (SPV).
Structural change to involve private capital – The compensation structure and accountability of banks create a problem for the market. Banks should be governed by a board while aiming to reduce the government’s stake and making the financial institutions attractive to private investors.
Credit Information Bureau – A good information system is required to prevent loan falling into bad hands and therefore prevention of NPAs. It helps banks by maintaining and sharing data of individual defaulters and willful defaulters.
Lok Adalats – They are helpful in tackling and recovery of small loans however they are limited up to 5 lakh rupees loans only by the RBI guidelines issued in 2001. They are positive in the sense that they avoid more cases into the legal system.
Compromise Settlement – It provides a simple mechanism for recovery of NPA for the advances below Rs. 10 Crores. It covers lawsuits with courts and DRTs (Debt Recovery Tribunals) however willful default and fraud cases are excluded.
Securitization – It refers to the process of converting loans and other financial assets into marketable securities worth selling to the investors.
Asset Reconstruction – It refers to conversion of non-performing assets into performing assets.
Enforcement of Security without the intervention of the Court.

Further, this act has been amended last year to make its enforcement faster.

ARC (Asset Reconstruction Companies) – The RBI gave license to 14 new ARCs recently after the amendment of the SARFAESI Act of 2002. These companies are created to unlock value from stressed loans. Before this law came, lenders could enforce their security interests only through courts, which was a time-consuming process.
Corporate Debt Restructuring – 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.
5:25 rule – Also known as, Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries. It was proposed to maintain the cash flow of such companies since the project timeline is long and they do not get the money back into their books for a long time, therefore, the requirement of loans at every 5-7 years and thus refinancing for long term projects.
Joint Lenders Forum – It was created by the inclusion of all PSBs whose loans have become stressed. It is present so as to avoid loan to the same individual or company from different banks. It is formulated to prevent the instances where one person takes a loan from one bank to give a loan of the other bank.
Mission Indradhanush – The Indradhanush framework for transforming the PSBs represents the most comprehensive reform effort undertaken since banking nationalization in the year 1970 to revamp the Public Sector Banks (PSBs) and improve their overall performance by ABCDEFG.
Insolvency and Bankruptcy Code (IBC) – With the RBI’s push for the IBC, the resolution process is expected to quicken while continuing to exercise control over the quality of the assets. There will be changes in the provision requirement, with the requirement for the higher proportion for provisions going to make the books better.
Credit Risk Management – This involves credit appraisal and monitoring accountability and credit by performing various analysis on profit and loss accounts. While conducting these analyses, banks should also do a sensitivity analysis and should build safeguards against external factors.
Tightening Credit Monitoring – A proper and effective Management Information System (MIS) needs to be implemented to monitor warnings. The MIS should ideally detect issues and set off timely alerts to management so that necessary actions can be taken.
Amendments to Banking Law to give RBI more power – The present scenario allows the RBI just to conduct an inspection of a lender but doesn’t give them the power to set up an oversight committee. With the amendment to the law, the RBI will be able to monitor large big accounts and create oversight committees.
More “Hair-cut” for Banks – For quite some time, PSU lenders have started putting aside a large portion of their profits for provisions and losses because of NPA. The situation is so serious that the RBI may ask them to create a bigger reserve and thus, report lower profits.
Stricter NPA recovery – It is also discussed that the Government needs to amend the laws and give more power to banks to recover NPA rather than play the game of “wait-and-watch.”
Corporate Governance Issues – Banks, especially the public sector ones, need to come up with proper guidance and framework for appointments to senior level positions.
Accountability – Lower level executives are often made accountable today; however, major decisions are made by senior level executives. Hence, it becomes very important to make senior executives accountable if Indian banks are to tackle the problem of NPAs.

With the potential solutions above, the problem of NPA in Indian banks can be effectively monitored and controlled, thus allowing the banks to achieve a clean balance sheet

Impact of NPA on Indian Economy | UPSC – IAS

Stress in banking sector causes less money available to fund other projects, therefore, negative impact on the larger national economy.
Higher interest rates by the banks to maintain the profit margin.
Redirecting funds from the good projects to the bad ones.
As investments got stuck, it may result in it may result in unemployment.
In the case of public sector banks, the bad health of banks means a bad return for a shareholder which means that the government of India gets less money as a dividend. Therefore it may impact easy deployment of money for social and infrastructure development and results in social and political cost .
Balance sheet syndrome of Indian characteristics that is both the banks and the corporate sector have stressed balance sheet and causes halting of the investment-led development process.
NPAs related cases add more pressure to already pending cases with the judiciary.
Increase in Current Account Deficit: It is the main cause of the increase in current account deficit and interest rates, CRR, SLR are directly affected by the system.
Confidence in shareholders: Higher NPA loses the confidence of shareholders.
Effect on Borrowers: High NPA not only affect the serious borrowers but also affect borrowers with good credit scores.

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Banking System in India – Non Performing Assets

Non-performing Assets (NPAs)

INTRODUCTION

In the last article on “ Understanding the banking system “, we had discussed the Basel norms.

We learnt what Basel norms are and why they hold such importance for the Indian banking system. Then we understood the challenges the banks will have to face in implementing them. Further, we suggested a possible way out.

Previous discussion highlighted why stability in the banking system is important. Following that discussion, in this article we will be discussing one of the biggest challenges threatening the stability of the Indian banking system – the Non-Performing assets (NPAs).

The banking business has boomed since Independence, particularly after the LPG reforms. The sector is currently valued at Rs 115 lakh crore and expected to more than double at Rs 288 lakh crore by 2020. Out of this 70 per cent of business is being done by PSU banks. An interesting fact is that SBI’s market share out of total banking business is 22 per cent!

Looking at the enormous size of the banking industry, the NPAs are a big cause of concern.

We will first look at some of the basics of NPAs; then move on to understand their causes and implications; then examine the challenges that the banks will face because of them; and finally put forward possible solutions.

The discussion will also cover the social agenda behind the banking and whether it is unviable for the Indian banks.

WHAT ARE NPAS?

Generally speaking, NPA is any asset of a bank which is not producing any income.

In other words, a loan or lease that is not meeting its stated principal and interest payments.

On a bank’s balance sheet, loans made to customers are listed as assets. The biggest risk to a bank is when customers who take out loans stop making their payments, causing the value of the loan assets to decline.

Loans don’t go bad right away. Most loans allow customers a certain grace period. Then they are marked overdue. After a certain number of days, the loan is classified as a nonperforming loan.

Banks usually classify as nonperforming assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue.

For agricultural loans, if the interest and/or the installment or principal remains overdue for two harvest seasons; it is declared as NPAs. But, this period should not exceed two years. After two years any unpaid loan/installment will be classified as NPA.

1. Sub-standard: When the NPAs have aged <= 12 months.

2. Doubtful: When the NPAs have aged > 12 months.

3. Loss assets: When the bank or its auditors have identified the loss, but it has not been written off.

After a certain amount of time, a bank will try to recoup its money by foreclosing on the property that secures the loan. The way money is recouped is a highly contentious issue not just with banks but also with Micro-Finance Institutions (MFIs). We will discuss it later in the article.

All of this can be explained in a much more technical manner, but that is not required here. For example, we do not need to list all the conditions that make the banks declare an asset as NPAs like ” In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.”

Only understanding the basic concepts will suffice. UPSC is not going to ask you these details, but about the impact and solutions of NPAs. Even in prelims, these details will not be asked. So we avoid technicalities and jargons here. It is not useful for a GS paper, even if some of it may be useful for Economics optional paper.

EXTENT OF NPAs

Gross NPAs of domestic banks jumped to 4.2 % of total lending by the end of September 2013 from 3.6 % six months before, according to the Reserve Bank of India (RBI).

As per a recent warning by the RBI, bad loans (NPAs) could climb to 7% of total advances by 2015.

In absolute terms, gross NPAs are estimated to touch Rs 2.50 lakh crores by the end of March this year. This is equal to the size of the budget of Uttar Pradesh. The biggest chunk of the soured debts is with state-run banks (Public sector banks or PSBs), which account for two-thirds of loans but 80 % of the bad assets.

This is how the NPA curve has been moving in the recent years, as per a news report in the Business Standard:

Private-sector and foreign lenders are better placed. Their NPAs in proportion of their lending is lesser than that of the PSBs.

WHY IT MATTERS?

The higher is the amount of non-performing assets (NPAs), the weaker will be the bank’s revenue stream.

In the short-term, many banks have the ability to handle an increase in nonperforming assets — they might have strong reserves or other capital that can be used to offset the losses. But after a while, if that capital is used up, nonperforming loans will imperil a bank’s health. Think of nonperforming assets as dead weight on the balance sheet.

Here is the impact of the NPAs:

As the NPA of the banks will rise, it will bring a scarcity of funds in the Indian security 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 a lot of money as banks themselves will find it tough to survive in the market.
This will lead to a crisis of confidence in the market. The price of loans, i.e. the interest rates will shoot up badly. Shooting of interest rates will directly impact the investors who wish to take loans for setting up infrastructural, industrial projects etc.
It will also impact the retail consumers like us, who will have to shell out a higher interest rate for a loan.
All of this will lead to a situation of low off take of funds from the security market. This will hurt the overall demand in the Indian economy. And, finally it will lead to lower growth rates and of course higher inflation because of the higher cost of capital.
This trend may continue in a vicious circle and deepen the crisis.
Total NPAs have touched figures close to the size of UP budget. Imagine if all the NPA was recovered, how well it can augur for the Indian economy.

RBI governor Raghuram Rajan has recently said that NPAs must be curbed before the problem becomes alarming .

WHY SUCH A SITUATION?

The rising incidence of NPAs has been generally attributed to the domestic economic slowdown . It is believed that with economic growth slowing down and rate of interest going up sharply, corporates have been finding it difficult to repay loans, and it has added up to rising NPAs. Even finance minister P Chidambaram stated that bad loans are a function of the economy and hence, having bad loans during distressed times is very natural.

However, The NPA mess is not entirely because of the reversal of economic cycles.

Here we look at the other reasons behind this mess. Basically the whole problem can be divided into two parts – External problems and internal problems as faced by the banks.

External Factors

Reasons related to the corporate sector.

This has adversely impacted the corporate sector in India. Continuing uncertainty in the global markets has lead to lower exports of various products like textiles, engineering goods, leather, gems etc. It can be noted that imports and exports combined equal to around 40% of India’s GDP!

A hurt corporate sector is finding it difficult to pay loans

Other sectors

Banks in India are highly regulated. Priority sector lending (PSL) is one of these regulations which require the banks to give a certain % of their loans to certain sections of society. These are farmers, SCs, STs, IT parks, MSMEs etc.

Naturally one would assume that the weaker sections covered under PSL are the ones to be blamed for the situation. However, it is not the case.

As per recent news reports, the Standing Committee on Finance will be now examining the reasons for high NPAS in PSBs.

The data, shared with the Standing Committee, shows that NPAs in the corporate sector are far higher than those in the priority or agriculture sector.

Within the priority sector, incremental NPAs were more in respect to micro small and medium enterprises followed by agriculture.

However, even the PSL sector has contributed substantially to the NPAs.

As per the latest estimates by the SBI, education loans constitute 20% of its NPAs !

The sluggish legal system (Judiciary in India) and lack of systematic and constant efforts by the banks make it difficult to recover these loans from both corporate and non-corporate.

Internal Factors

1. Indiscriminate lending by some state-owned banks during the high growth period (2004-08) is one of the main reasons for the deterioration in asset quality.

2. Bankers say there is a lack of rigour in loan appraisal systems and monitoring of warning signals at state-run banks. This is particularly true in case of infrastructure projects, many of which are struggling to repay loans. Besides, these projects go on for 20 to 30 years.

3. Poor recovery and use of coercive techniques by banks in recovering loans

4. The wait and watch approach of banks have been often blamed as the reason for rising NPAs as banks allow deteriorating asset class to go from bad to worse in the hope of revival and often offer restructuring option to corporates.

A Parliamentary panel, examining increasing incidents of NPAs, has observed that state-owned banks should stop “ever-greening” or repeated restructuring of corporate debt to check the constant bulging of their non-performing assets. Members of the panel were of the view that NPAs are the result of bad economic situation, but there were also management issue of every-greening of loans, which could be avoided by “not renewing loans, particularly of corporate”.

Therefore, it can be clearly seen that it is only the economic slowdown that is behind the NPAs. There are a whole range of factors.

The simplest approach to cut down NPAs is to recover the bad loans.

Apart from the regular guidelines released by the RBI, to strengthen further the recovery of dues by banks and financial institutions, Government of India promulgated:

1. The Recovery of Debts Due to Banks and Financial Institutions Act, 1993

2. The Securitization Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 .

So, how can the banks legally recover their loans?

(i) The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 – The Act empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court, through acquiring and disposing of the secured assets in NPA accounts with outstanding amount of Rs. 1 lakh and above. The banks have to first issue a notice. Then, on the borrower’s failure to repay, they can:

Take possession of security and/or
Take over the management of the borrowing concern.
Appoint a person to manage the concern.

(ii) Recovery of Debts Due to Banks and Financial Institutions (DRT) Act: The Act provides setting up of Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs) for expeditious and exclusive disposal of suits filed by banks / FIs for recovery of their dues in NPA accounts with outstanding amount of Rs. 10 lac and above. Government has, so far, set up 33 DRTs and 5 DRATs all over the country.

(iii) Lok Adalats: Section 89 of the Civil Procedure Code provides resolution of disputes through ADR methods such as Arbitration, Conciliation, Lok Adalats and Mediation. Lok Adalat mechanism offers expeditious, in-expensive and mutually acceptable way of settlement of disputes.

Government has advised the public sector banks to utilize this mechanism to its fullest potential for recovery in Non-performing Assets (NPAs) cases.

Among the various channels of recovery available to banks for dealing with bad loans, the SARFAESI Act and the Debt Recovery Tribunals (DRTs) have been the most effective in terms of amount recovered.

The recent controversy surrounding loan recovery in India – Views of the SC

Banks have been alleged to engage in coercive practices to recover the loans. Recently, there have been some judicial pronouncements by the apex court determining the scope of powers of enforcement of securities without the intervention of the courts, by the banks and FIs under the SARFAESI Act. The apex court has reiterated the need to protect the interest of borrowers, and emphasized that the exercise of extraordinary powers of recovery, by banks and FIs must be in compliance with the provisions of the SARFAESI Act.

As per the Supreme Court (SC) – “”Liquidity of finances and flow of money is essential for any healthy and growth oriented economy. But certainly, what must be kept in mind is that the law should not be in derogation of the rights which are guaranteed to the people under the Constitution. The procedure should also be fair, reasonable and valid, though it may vary looking to the different situations needed to be tackled and object sought to be achieved.”

But, these are steps which cure the disease of NPAs. “The issue of NPAs needs to be tackled at the level of prevention rather than cure.”

Therefore, the steps that can prevent the piling up of NPAs are as follows:

1. Conservatism :

Banks need to be more conservative in granting loans to sectors that have traditionally found to be contributors in NPAs. Infrastructure sector is one such example. NPAs rise predominantly because of long gestation period of the projects. Therefore, the infrastructure sector, instead of getting loans from the banks can be funded from Infrastructure Debt Funds (IDFs) or other specialized funds for infrastructural development in the country.

2. Improving processes :

The credit sanctioning process of banks needs to go much more beyond the traditional analysis of financial statements and analyzing the history of promoters. For example, banks rely more on the information given by credit bureaus. However, it is often noticed that several defaults by some corporate are not registered in their credit history.

3. Relying less on restructuring the loans:

Instead of sitting and waiting for a loan to turn to a bad loan, and then restructure it, the banks may officially start to work to recover such a loan. This will obviate the need to restructure a loan and several issues associated with it. One estimate says that by 2013 there will be Rs 2 trillion worth of restructured loans.

4. Expanding and diversifying consumer base by Innovative business models:

Contrary to popular perceptions,the NPA in non-corporate sector is less than that in the corporate sector. Hence, there is a need to reach out to people in remote areas lacking connectivity and accessibility. More and more poor people in rural pockets should be brought under the banking system by adopting new technologies and electronic means. Innovative business models will play a crucial role here. Otherwise, the NPAs may increase instead of decreasing.

As said by the new M.D. of SBI, Mr. Viswanathan proposed ideas such as a single demat account for all investments and credit cards for school students (above class 8th) to make them aware with the banking system.

Looking at the giant size of the banking industry, there can be hardly any doubt that the menace of NPAs needs to be curbed. It 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. Therefore, it has to be dealt at multiple levels. The government can’t be expected to rescue the state-run banks with tax-payer’s money every time they fall into a crisis. But, the kind of attention with which this problem has been received by policymakers and bankers alike is a big ray of hope. Right steps, timely and concerted actions and a revival of the Indian economy will put a lid on NPAs. Prevention, however, has to become a priority than mere cure.

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1 . Question

Consider the following statements:

In India, the private sector banks have a larger market share than the public sector banks.
The NPAs of the private sector banks are far greater than that of the public sector banks.

Choose the correct answer using the codes below:

Solution: d)

2 . Question

Which of the following factors MAY adversely affect the level of NPAs of the Indian banks?

Slow economic growth.
Substantial delay in bank funded infrastructural projects.
Privatization of the PSBs.
1 and 2 Only
2 and 3 Only
1 and 3 Only

Solution: a)

3 . Question

Assertion (A): The NPAs under the corporate sector are much lesser than the ones given under Priority Sector lending norms.

Reason (R): The PSL norms, inter alia, cover the weaker sections of the society who may be unable to pay loans on time.

In the context of the statements above, which of these is true?

Both A and R are true and R is the correct explanation for A.
Both A and R are true and R is not the correct explanation for A.
A is incorrect but R is correct.
A is correct but R is incorrect.

Solution: c)

4 . Question

Disputes concerning NPAs in India, can be sorted out by which of these mechanisms:

Arbitration
Moving the Lok Adalat
Moving the concerned quasi-judicial and regulatory authorities in case of infrastructure projects.

5 . Question

Which of the following can be possible consequences of very high unmanageable NPAs?

Economic slowdown and possible recession.
Rise in interest rates of loans.
Scarcity of funds in the security market.

1. In your view, what can be the possible reasons behind the increasingly high NPAs of the Indian banks? How far can this be attributed to the conditions prevailing in the Indian and global economy? (300 words)

2. Explain how high NPAs can be damaging to the Indian economy. (200 words)

3. How far can financial inclusion help in containing the high level of NPAs of banks in India? Substantiate your views with two examples. (200 words)

4. What are the legal mechanisms that can be used to contain the NPAs? Bring out clearly the role of each actor – the RBI, the Government of India, and the banks in achieving lower NPAs through legal mechanisms. (300 words)

5. The Infrastructural projects are faced with several problems especially related to financing of the projects by commercial banks. Examine the bottlenecks in the present system of financing. What can be done to address these issues? (200 words)

6. Despite having a much larger share in the Banking market, the state-owned banks have not performed well financially. Critically examine. Can the problem be resolved by de-nationalizing the poorly performing banks? (300 words)

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COMMENTS

Essay On NPA In Indian Banks | NPA Essay In 250+ Words Step ...
In simple words, it is a submerged debt of Banks. According to banking rules, when the EMI, Principal amount or interest of a loan does not come within 90 days of the due date, it is called NPA. That is, when a bank stops getting returns from a loan, then it becomes an NPA or bad loan for the bank.
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In simple terms, a loan or advance for which the principal or interest payment remained overdue for specified period generally 90 days is known as non-performing assets (NPA).
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Long and Short Essays on NPA for Students and Kids in English. We are providing students with samples of essay on a long essay of 500 words and a short essay of 150 words on the topic NPA for reference.
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Non-Performing Asset (NPA) crisis in India is set to worsen. What are reasons for NPAs? What are the steps taken by the Government to tackle bad loans?
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A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days. 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.
NPA in India and its impact on Indian Economy | UPSC – IAS
NPA in India and its impact on Indian Economy | UPSC – IAS. According to Reserve Bank of India (RBI) explains the definition of NPAs, “An asset makes non-performing when it stops to generate income for the bank.”
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Generally speaking, NPA is any asset of a bank which is not producing any income. In other words, a loan or lease that is not meeting its stated principal and interest payments. On a bank’s balance sheet, loans made to customers are listed as assets.
Non Performing Assets & Indian Banks - BYJU'S Exam Prep
Non-performing asset (NPA) refers to the classification for loans or advances that are in default or in arrears. An asset including a leased asset, becomes non-performing when it ceases to generate income for the bank.