What are NPAs?


NPA stands for Non-Performing Assets of the banks. It simply means:

Bank gives a loan to a person.


The concerned person fails to pay loan installment for 3 months. (Even after repeated notices from the bank).


Banks declare such loans as ‘bad loans’ or NPA.


Reasons for NPAs


Dynamic policy changes.


Deadlock in Infrastructure sector.


Sluggish economic conditions deterring overseas investors from investing in India.


Reviving US economy is taking the invested money back from India.


Political uncertainty prevalent in India.


Strict priority sector lending norms.


To overcome the problems of NPA various steps have been taken by different bodies.


Steps taken by the Government


Earlier on the recovery of bad loans from the borrowers, the borrowers filed trivial cases in civil courts.


These made recovery procedure prolonged and hardly any bad loans could be recovered.


Firstly, the Government established Debts Recovery Tribunals (DRT) to deal exclusively with NPA matters. But DRT got clogged with too many pending cases.


Secondly, the Govt. came up with SARFAESI Act 2002, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act.


Under this act, the government gives banks the following powers to recover bad loans-

Taking possession of assets without any order of the court.


Auction or sale of the assets.


Amending the management or administration of the assets.


If the assets are sold to a third party, banks can order debtors to pay the bank.


Note: Here the Bank can take away only those assets which were mortgaged or secured to take the loan. But if the bad loan belongs to a company, the banks cannot take away any other personal asset (belonging to individuals in the company as opposed to the company itself) to offset the bad loan. An example is Vijay Mallya of Kingfisher. Though the company declared itself bankrupt and unable to pay back loans, banks cannot seize personal assets belonging to him.


Thirdly, came the idea of Asset Reconstruction Company (ARC).


ARCs buy bad loans from the banks and try to extract maximum profit out of these bad loans. But a problem arises here as not many invest in ARCs and so their capacity to buy NPAs is very low.


Lastly, the newly introduced Banks Board Bureau (BBB) formed to govern all the PSBs will take care of the supervision of the banks. BBBs will also look into strategic planning, risk management and business performance of the PSBs.


Steps taken by the RBI


RBI implemented Basel-I norms in 1992. Banks had to attain 8% Capital to Risk-Weighted Assets Ratio (CRAR) aka Capital Adequacy Ratio (CAR).


RBI has now fixed the deadline of 31st March 2019 to implement BASEL-III norms.


In BASEL–III, banks have to maintain a Minimum Total Capital (MTC) of 9% of Total Risk Weighted Assets (RWA).


To promote more investment in asset reconstruction in India, RBI has increased FDI cap on asset reconstruction companies (ARCs).


RBI has also introduced Strategic Debt Restructuring Scheme (SDR).


This step was introduced to ensure that the shareholders of the company bear the first loss of the bad assets rather than the debt holders (banks).


RBI suggests that equity shares of the Company should be transferred by promoters to lenders to compensate for their sacrifices.


SDR also includes Framework for Distressed Assets.


It concentrates on early recognition of stressed assets. Banks are required to route the assets through 3 classes of Special Mention Accounts (SMA- 0, 1, and 2) before classifying it as an NPA.


Moreover, the SMA-2 classified leaders of banks need to form a Joint Lenders Forum (JLF). They have to formulate a Corrective Action Plan (CAP) in order to de-stress the asset.


RBI has also set up Central Repository of Information on Large Credits (CRILC).


CRILC is a registry to keep records of large borrowers and those assets which are under stress.


Steps Taken by Banks


The slowdown in the economy in the last few years (due to recession) has led to a rise in bad loans or NPAs.


Banks have been given more flexibility and powers to deal with these NPAs.


Not only the NPAs but also the rising percentage of restructured assets is a point of contention.


Restructured assets – when a borrower is unable to pay back the loan, the bank makes the loan more flexible. It allows the loan to be paid back over a longer period of time.


The NPAs and Restructured Assets together put pressure on a bank’s profitability.


The banks will be left with less capital to lend extensively to other sectors.


The funding for various important developmental projects will be left dry for too long.


 Vicious Cycle of NPA in an Economy




The cycle of NPAs in an Economy starts with Rising NPA in Banks, followed by Bank’s Profitability and Capital Reduction, Reduction in Bank’s lending to various sectors, No investment & installation of Developmental Projects ultimately leading to Slow Economic Growth.




 


What are new Governance Reforms or Recapitalisation of Banks?


The NPAs of all PSBs (Public Sector Banks) was almost Rs. 4 lakh crore at the end of December 2015.


Also the banks have a deadline of March 2019 to comply with Basel-III norms.


The government has launched a seven-point agenda to revive the PSBs – Indradhanush.


It includes 70,000 crore capital infusion over the next four years. This number may go up after Budget 2016-17.


The remaining amount have to be raised by PSBs through domestic and foreign investments by tapping equity markets.


Banks have to sell their shares to public directly, though the govt. will continue to remain the majority shareholder.


Conclusion


The amount that has been set aside by the govt. for recapitalisation of the PSBs is not enough to root out the issue of Non-Performing Assets and distressed banking sector completely. Need of the hour is a comprehensive bailout package which will enable banks to rekindle the spirit of lending. In return, our economy can come out of the vicious cycle of NPA and aid the urgently needed economic growth path set out by the govt. However, this will mean a heavier toll on the pocket of taxpayers and consumers alike, as the govt. will need fund this bailout from collected revenues.