NPA in Banking Sector
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- General Studies 2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation; Important aspects of governance, transparency and accountability
- General Studies 3: Indian Economy and issues relating to mobilization of resources, growth, development
In News: The non-performing assets (NPAs) in the Indian banking system have become a big concern – posing a threat to the stability of the country’s financial system and the economy. India has been ranked fifth on the list of countries with the highest Non-Performing Assets (NPAs), by CARE Ratings.
What is NPA?
NPA in terms of RBI regulations result out of non-payment of interest for a period of 90 days or non-payment of principle amount for 90 days or more. So beyond that point, it is called Non-Performing Asset. The loan is taken by the company on its assets from the bank. When the asset is not performing because they become doubtful and NPAs from doubtful become bad loans.
A glimpse into the history:
The problem name NPA is not of recent origin. Few years back, India suffered from a huge infrastructuregap and the banking sector was encouraged to get themselves into a lending spree for companies willing to undertake various projects. Public Sector Banks were actually pushed to provide loans for projects that were floated largely by the private sector.
The following have caused distress in the banks’ assets and have played part in the mounting NPAs –
- Prolonged downturn in the world economy,
- Falling commodity prices,
- Lack of due diligence and adherence to rules (inadequate and poor risk assessment of the proposals by the banks)
- Complex workings of the bureaucracy,
- Typical bureaucratic red tape,
- Long delays and gestation periods of several infrastructure projects,
- Delays in land acquisition and
- Politically inspired agitations
The NPA “SAMADHAN” Project
- Resolution process must move on smoothly – and not be stalled by long drawn legal wrangling’s. Longer the delay, the resolution of assets will be postponed further. The capital that is blocked in the NPA would not yield anything and will continue remaining stressed.
- It is important to recognize that even if we could resolve quickly, no matter the amount of “haircut” there exists a major upside for both the economy and the bank:
- Economy: 1000 of stalled projects will come back contributing to the growth and positive GDP evaluation
- Bank: As they have been provided for 100% for the stressed assets, at leasttheir financialhealthwould turn better.
- Issues causing moral hazard: Do we allow promoters who have made these assets stressed, to bid directly or indirectly for the same projects?
- Government has taken a decision that promoters who have stressed assets to their book of accounts should not be allowed to bid for any further stressed asset.
- Resolution process must be pragmatic –Rules must be clear upfront. Tricky questions should not be allowed to clout and delay the process of resolution. Correct procedures should be followed.
The Way Forward:
- Post resolving stressed assets, there is no guarantee that it will not come up again.To prevent a recurrence of such failure, it is important to reform not just governance, but also regulatory oversight. The failures of banking regulation must be addressed and checks and balances created.
- Consolidation could be the first step for stringer balance sheet but the next step should be to reduce government’s stake to below 49% so that the banks can work without any political influence.
- Need to be mindful of the 4 Rs —
- ‘Recognition’ of assets close to their true value
- ‘Recapitalisation’ or infusion of equity for banks to protect their capital
- ‘Resolution’ in the form of selling underlying stressed assets
- ‘Reform’, through the right future incentives for the private sector and corporates to ensure there is no repeat of the twin balance sheet syndrome.
Connecting the Dots:
- What is Non-Performing Assets (NPA)? Why are they detrimental for the economy? Examine.
- NPAs or stressed assets have adversely affected the banking system in India. In this light, identify the factors that have led to this status and also examine the steps taken by the Government and the RBI to address the same.
- Which major sectors contribute the maximum to bad loans or NPAs in India? What is the way out? Analyse.