Model Paper

Current State of Non-Performing Assets (NPAs) in India

As per the Financial Stability Report of RBI, India’s banking sector has witnessed a significant improvement in the Non-Performing Assets (NPAs) situation. The gross NPA ratio has decreased to a seven-year low of 5% in 2022-23 from a peak of 9% in 2017-18. Similarly, the net NPA ratio stands at a ten-year low of 1.3%, with private banks reporting a net NPA ratio below 1%.

Factors Contributing to the Decline in NPAs

1. Drop in Slippage Ratio: Scheduled Commercial Banks (SCBs) have shown a slippage ratio of around 2% in September 2022, the lowest since 2015. This ratio indicates a decrease in fresh NPAs being added to the system.
2. Improvement in Asset Quality: Efforts to address legacy NPAs have led to improved transparency in asset recognition and write-offs, enhancing the overall asset quality.
3. Credit Growth: Banks have experienced increased credit growth, boosting profitability and reducing interest expenditures since 2014-15.

Key Measures Implemented to Address the NPA Crisis

1. Asset Quality Review (AQR): Initiated by the RBI in 2015, the AQR revealed the extent of NPAs in banks, prompting corrective actions.
2. Prompt Corrective Action (PCA) Framework: Banks were placed under PCA to enforce corrective measures promptly.
3. Recapitalisation of Public Sector Banks (PSBs): The government injected capital into PSBs through successive budgets, such as Rs 20,000 crore in 2021-22, to enhance their capital adequacy.
4. Mission Indradhanush: Institutional reforms were introduced through Mission Indradhanush, focusing on elements like governance reforms and stress management.
5. National Asset Reconstruction Companies: Specialized institutions were established to purchase NPAs from banks, aiding in cleaning up their balance sheets.
6. India Debt Resolution Company Ltd (IDRCL): Created to manage assets and engage turnaround experts, with stake distribution between public and private sector lenders.
7. Insolvency and Bankruptcy Code (IBC): Introduced in 2016 for time-bound resolution of corporate insolvency, empowering operational creditors and introducing mechanisms like Pre-Packaged Insolvency Resolution Process (PPIRP).
8. EASE Reforms: Enhanced Access and Service Excellence (EASE) Reforms aimed at promoting clean and efficient banking practices in PSBs.

In conclusion, continuous vigilance and adherence to sound credit practices are crucial for banks to mitigate credit risks, especially amidst evolving macro-economic conditions and global challenges.