The NPA Problem

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TOPIC: General Studies 2

• Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

In news: At ratio of 9.85%, India has the highest level of NPAs among the BRICS countries and is ranked 5^th in the countries with highest NPA level. According to the official figures, the gross NPA of PSBs and private sector banks is 7.34 lakh crore and 1.38 lakh crore rupees each.

Where are NPAs? RBI’s financial stability report names the basic metal and cement industries as most indebted with construction, infrastructure and automobile industry also accounting for sizeable chunks of banks’ NPAs.

Recovery of these NPAs is also declining steadily over past 10 years due to rising bad loans, shrinking profitability and weak recovery of return of loans necessitated the need for higher capital infusion in PSBs. To mitigate this, the government has already announced 2.11 lakh crore of re-capitalisation funds.

Reasons for problems in banking sector

• Asset quality review unearthed the problem of subdued NPAs. These NPAs were hidden in the bank’s balance sheet but were not reflected properly. Hence the NPAs were being accumulated over the years.
• The rate of recovery is changing. In 2009, it was high as 60% and now it has come down to 20%. This means that the problem has become worse. So, apart from legacy problem, it is something which has worsened over past couple of years.

Non-resolution of issue

• CDR, SDR, S4A, 5-24 schemes were just deferring the NPA issue.
• It has to be recognized that the underlined NPA problems are also economic. The country has many companies which are facing large number of demand shortages and under capacity utilization. The greatest problem is decline in fixed investments that has taken place in 4-5 years. However, within this framework, there are differences too where many companies are doing well. Thus, people who have got the funds are not necessarily competent enough to run the company as during good times, everybody was interested in investing in infrastructure despite not having competence and knowledge in that area. This is also a reason why NPAs are at such high levels.
• How good is the bank in risk analysis of lending? How good is the risk analysis system internally? These were the key

How to reduce NPAs?

The solution will lie at economy growing at a fast pace. Much of the bad debt has arisen because of business cycle. It has become a vicious cycle. For economy to turnaround, the banks have to lend and bring investments which the economy requires. But as there is a shortage of capital in the banking industry, there will be hesitation in banks to fund the large products. As of now the bankers today are financing the retail sectors which is not good. The banks should have sensible system of risk analysis. Also, there is need for better private bond market where not banks finance it but they are issued publicly.

Insolvency and bankruptcy code is going to help fighting the NPAs. But there is no short term solution to the NPAs. The re-capitalisation should be effectively utilized so that in next 2 years, it will help banks in lending without injuring the balance sheet.

Connecting the dots:

• ‘NPAs are caused only due to economic slowdown’. Do you agree? Give reasons.