What are assets that do not perform (NPAs)? Describe the steps the government has recently made to combat the threat posed by non-performing assets (NPAs) in India. (Answer in 200 words)
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What are assets that do not perform (NPAs)? Describe the steps the government has recently made to combat the threat posed by non-performing assets (NPAs) in India. (Answer in 200 words)
A non-performing asset (NPA) refers to a classification for loans or advances of a bank that are in default or arrears. The period beyond the ‘due date’, past which the principal or interest payments are considered late or missed, has been accepted as ’90 days’ in India. For agricultural advances, instead of 90 days overdue, cropping seasons are taken into consideration. Banks are required to classify non-performing assets further into the following three categories
As per RBI data, gross non-performing assets (GNPAs) of scheduled commercial banks in 2021 have doubled since 2014, but have declined from ₹9.5 trillion in FY19 to about 8 trillion as of 30.9.2021. To resolve the issue of NPA, the Indian government has introduced interventions in four major areas (4Rs):
1. Recognition of NPAs or hidden stress:
2. Recapitalization of Banks:
3. Resolution of insolvency:
4. Reform:
The broad-based nature of the solution to the NPA problem acts as a catalyst for the overall banking reforms. Increasing levels of NPAs can act as an appropriate anchor for monitoring and progressing towards the better overall health of the financial system.
Non-Performing Assets (NPAs) are loans or advances that remain overdue for a period of 90 days or more, wherein the borrower has stopped making interest or principal repayments. NPAs indicate the poor financial health of the banking sector and reflect the inability of borrowers to fulfill their repayment obligations. High levels of NPAs can strain a bank’s profitability and liquidity, thereby affecting the overall stability of the financial system.
Measures Taken by the Indian Government to Address NPAs:
1. Insolvency and Bankruptcy Code (IBC), 2016: The IBC was introduced to provide a time-bound resolution process for distressed assets. It streamlines the process of bankruptcy and insolvency, making it easier to recover bad loans. This has been a critical step in addressing NPAs by ensuring faster resolution and recovery.
2. Formation of Bad Bank: The establishment of the National Asset Reconstruction Company Limited (NARCL) or ‘Bad Bank’ aims to aggregate and consolidate stressed assets for efficient resolution. The government’s move to set up this entity helps in cleaning up the balance sheets of banks by transferring NPAs to the bad bank for focused resolution.
3. Recapitalization of Public Sector Banks (PSBs): The government has infused significant capital into PSBs to strengthen their balance sheets and enhance their capacity to lend. This recapitalization helps banks to provision for NPAs and absorb losses, thereby improving their financial health.
4. Strengthening Regulatory Framework: The Reserve Bank of India (RBI) has introduced several measures, such as the Prompt Corrective Action (PCA) framework, which imposes restrictions on banks with high NPAs to prevent further deterioration. The RBI also introduced the revised framework for the resolution of stressed assets to ensure early identification and resolution.
5. Asset Quality Review (AQR): The RBI conducted an AQR to identify and acknowledge the extent of NPAs in the banking system. This initiative brought transparency and prompted banks to recognize stressed assets promptly.
6. Pradhan Mantri Jan Dhan Yojana (PMJDY): While not directly targeting NPAs, the PMJDY promotes financial inclusion and responsible lending. By bringing more people into the formal banking sector, it aims to reduce the incidence of default due to better access to banking services and financial literacy.
7. Corporate Governance Reforms: The government has emphasized improving corporate governance within banks. Measures include strengthening the functioning of the boards of banks and ensuring better risk management practices.
These measures collectively aim to address the menace of NPAs by enhancing the resolution mechanisms, strengthening the regulatory environment, and improving the financial health and governance of banks in India.
NPA stands for Non-performing assets (NPAs). As per the Reserve Bank of India NPAs are loans or advances, due for more than 90 days. In other words, an asset becomes non-performing when it stops generating income for the bank. In case of agricultural advances cropping seasons are taken into consideration instead of 90 days. Increasing NPAs is not a good sign for the banking sector and economy as it shows the inability of people to repay the loan.
Types of NPAs
Non-performing assets are categorized into various types based on specific criteria.
1. Substandard Assets: The assets have remained NPA for a period less than or equal to 12 months.
2. Doubtful Assets: Assets that have remained in the substandard category for 12 months.
3. Loss Assets: Assets where loss has been identified by the bank or external auditors or the RBI, but the amount has not been written off.
Measures Taken to Control NPAs by the Government
1. Insolvency and Bankruptcy Code (IBC), 2016:
It aims to improve the ease of doing business and a single-step solution to resolve insolvency issues.
To oversee the implementation of the law and insolvency professionals.
The incorporation of the IBC has significantly improved the recovery rates of bad loans by providing quicker resolution and restructuring of assets.
2. Asset Quality Review (AQR):
The RBI introduces an AQR to identify stressed assets in the banking system. This exercise focused on bringing transparency and improving the recognition of NPAs on the bank’s books.
3. Strategic Debt Restructuring (SDR), 2015:
If corporations are unable to repay their bank loans, the banks have the option to convert part or all of the loans into equity shares.
4. Mission Indradhanush:
This initiative was launched to revise the functioning of PSBs and identify issues like accountability, governance, and the overall condition of the banking sector.
It includes appointing professionals to major positions, empowering risk control measures, and improving the efficiency of bank operations.
5. Debt Recovery Tribunal (DRT), 2013:
It is governed by the Recovery of Debt Due to Banks and Financial Institutions Act, of 1993.
The aim was to shorten the time needed for case settlements.
6. Joint Lenders Forum (2014):
This measure is implemented to prevent the situation where a loan is taken from one bank to repay loans from other banks.
7. 5:25 Rule (2014):
It is also known as the Flexible Restructuring of Long Term Project Loans to Infrastructure and Core Industries and involves the refinancing of long-term projects.
8. Corporate Debt Restructuring (2005):
It minimizes the company’s debt burden by extending the repayment period and lowering the interest rates.
9. Asset Reconstruction Companies (ARC)
This measure helps in recovering value from distressed loans without going through the time-consuming process of court.
10. The SARFAESI Act (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act), 2002:
This act allows banks and financial institutions to auction residential or commercial properties to recover loans of defaulters.
The amendment in 2016 aimed to encourage banks to take possession of collateral security and sell them without the interference of courts.
11. Bad Bank – National Asset Reconstruction Company Limited (NARCL):
The government suggested setting up a ‘bad bank’ to manage and dispose of stressed assets of banks.
It will facilitate the aggregation and resolution of large-value NPAs along with the India Debt Resolution Company Limited (IDRCL).
12. Empowering Governance in Banks:
It includes the establishment of the Banks Board Bureau (BBB) to recommend appointments of directors and ensure the professionalization in bank management.
Improved investigation and accountability norms to avoid the reoccurrence of large frauds.
13. One-Time Settlement Schemes:
Banks have been encouraged to offer one-time settlement schemes to borrowers, especially in the MSME sector, to expedite the recovery process.
14. MSME Debt Restructuring:
The government and RBI have provided relief to the MSME sector by allowing the restructuring of their stressed assets without devaluing them.