Non Performing Assets(NPA):A burgeoning burden

Why in news?

An increasing amount of NPA has become a cause of worry for the financial system. The percentage of gross non-performing assets (GNPAs) for the banking sector is expected to worsen from 3.9 % of advances in fiscal 2013-14 to about 4-4.2 % in 2014-15. The NPAs of private banks also increased by 20 basis points to 2.0 % in the quarter.

The steep economic activity, accompanied by high interest rates, has led to a sharp deterioration in asset quality for the banking sector and increased the pressure of NPAs.

What is NPA?

• Non- Performing Assets (NPA) are the assets i.e. the loans and advances given to customers of the banks which do not bring any return. If the customers do not pay either interest or part of principal or both, the loan is called a Bad Loan or NPA.
• According to RBI, the terms loans on which interest or instalment of principal remain overdue for a period of more than the grace period (90 days) from the end of a particular quarter is called a Non-performing Asset.

How it works?

Suppose a bank gives loan to a person, now the person has become an asset to the bank. If the person doesn’t repay any principal or interest on that loan even after the grace period from the date of taking the loan, the bank will consider that person to be a probable defaulter and it will create a provision for doubtful debts (debts which won’t be recovered) at the rate specified by RBI and the Banking Regulation Act, 1949.

Why it matters?

• As the bad loans keep increasing in the company’s bank account, the less revenue will be generated and it will make the banks inflows weaker.
• The increased NPA will have impact on many PSB’s overall survival which are planning to raise capital to meet BASEL III norms.
• Increasing bad loans have an impact on overall economy as bank will lend less leading to less investment in projects thereby decline in growth.
• The decline in growth could start flight of money(due to crisis of confidence),depreciation in currency which ultimately will accentuate the problem.
• It also affects the socio-economic well being of people as it will have an impact on the Govt. policies, micro-finance, farmer’s loan etc. Retail investors will have to bear the higher interest rates.

Why loans became bad loans:

• Domestic slowdown in economy led to non-realisation of profits and in turn big corporate were unable to recover their investment thereby leading to non-payment of loan.
• The global financial crisis(2008) and recent slowdown in various big economies have largely impacted the investment and export process of India.
• As per RBI reports the share of NPA in industrial sector(non-priority) is greater than priority sector which is a big concern as major chunk of GDP is associated with non-priority sector.
• Delay in projects (due to environmental clearance, land acquisition),long gestation periods, difficulty in getting credit is also worsening the problem.
• Apart from it indiscriminate lending by many PSBs to large corporate, loan waiver to farmers(due to political pressure),delay in realisation of bad loans ,wilful defaulters are also the cause of NPA.

Govt.’s steps to improve bad loans:

• The SARFAESI Act:The banks can use an effective tool for the recovery of NPAs known as “The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act .Enacted in 2002 the SARFAESI, Act has the provisions for the banks to take legal recourse to recover their dues. In case of default payment, the bank can issue a notice to the borrower to pay his dues with 60 days and if the dues are not paid within the given time period  the bank has the power to take possession of the asset (except agricultural land) and can also give it on lease or sell it, without any intervention of the court. With this regard banks have started to sell it to the Asset restructured company(ARC).
• For early recognition of bad assets banks have been asked to form JLF(joint lenders forum,a formal group of lenders) to initiate the resolution mechanism.
• Corporate Debt Restructuring(CDR)under which banks and other financial institutions will come together to restructure the debt of a company facing financial difficulties.
• Recently RBI has initiated Strategic Debt Restructuring(SDR) which will convert lender’s debt into equity in distressed listed firms, following which banks may not need to make the mandatory open offer in case of acquiring control in such entities.
• Govt. has also initiated the process to infuse the capital in state owned banks on the basis of performance so than they can maintain their CAR(Capital Adequacy Ratio)   

Need of Hour:

The burgeoning NPA have become the burden on overall economy which requires a thoughtful solutions. So early recognition and resolution of sticky assets with better recovery of funds( by strengthening the debt recovery tribunal and starting of national ARC),strict action against wilful defaulters, more freedom in asset restructuring and infusion of capital in the market which can reduce long term funding ,can help to keep the business cycle at pace.