Syllabus: GS3/Economy
Context
- As per the Reserve Bank of India (RBI), the gross non-performing assets (GNPAs) ratio of scheduled commercial banks (SCBs) declined to the lowest in more than 13 years.
Major Highlights
- In fiscal year 2024 (FY24), the consolidated balance sheet of commercial banks in the country remained robust, marked by sustained expansion in both credit and deposits.
- Decline in NPA Ratio:
- March 2010-11: The gross NPA of banks stood at 2.35%.
- March 2024: GNPAs of banks reduced by 15.9% year-on-year (y-o-y).
- Sept 2024: The gross NPA ratio improved further to 2.5%.
- Sectorwise:
- The GNPA ratio remained the highest for the agricultural sector at 6.2% and the lowest for retail loans at 1.2% at end-September 2024.
- The GNPA ratio of education loans fell 2.7% at end-September 2024.
- It remained the highest across retail loan segments, followed by credit card receivables and consumer durables.
| Gross non-performing assets (GNPA) Ratio – The Gross Non-Performing Assets (GNPA) ratio is a financial metric used to assess the health of a bank or financial institution by measuring the proportion of its total loan assets that are classified as non-performing. 1. Non-performing assets (NPAs) are loans or advances where the borrower has stopped paying interest or principal repayments. – Higher GNPA ratio: Indicates a higher proportion of loans at risk of default, which can be a sign of financial distress for the bank. 1. It suggests that a larger portion of the bank’s loan portfolio is not generating income as expected. – Lower GNPA ratio: Indicates a healthier loan portfolio with fewer loans at risk of default, implying better asset quality and financial stability for the bank. – Regulatory Aspects: Banks are required to report their GNPA ratios regularly to regulators as part of financial transparency and risk assessment measures. |
Non-performing Loans
- Bad loans, also known as non-performing loans (NPLs), are loans where the borrower has failed to make the required payments (interest or principal) for an extended period, typically 90 days or more.
- These loans are considered risky for lenders because they are unlikely to be repaid in full, leading to financial losses.
Causes of Bad Loans
- Poor Lending Practices: Banks and financial institutions sometimes lend to borrowers without proper credit assessments or due diligence.
- Economic Downturns: Economic slowdowns and industry-specific crises affect borrowers’ ability to repay loans.
- Corporate Mismanagement: Companies with poor management or inefficient operations often struggle to generate profits and repay loans.
- Overleverage: Borrowers taking on excessive debt without sufficient ability to repay lead to defaults.
- Fraud and Corruption: Fraudulent activities or corruption in the lending process can result in bad loans.
- Regulatory Issues: Weak regulatory oversight leads to inadequate risk assessment and monitoring of loans.
Impact
- Economic Slowdown: High levels of bad loans reduce credit availability, slowing economic growth and investment.
- Bank Financial Health: Banks face increased financial stress due to higher provisions for bad loans, affecting profitability and stability.
- Lower Lending Capacity: With more capital tied up in non-performing loans, banks have less to lend to productive sectors.
- Investor Confidence: High bad loan levels erode investor trust in the banking sector, affecting stock markets and foreign investment.
- Government Burden: The government may need to intervene with bailouts or recapitalization, increasing fiscal pressure.
- Job Losses: Companies facing financial difficulties due to bad loans may cut jobs, leading to higher unemployment.
Government Initiatives
- Insolvency and Bankruptcy Code (IBC): Introduced in 2016 to speed up the resolution of distressed assets and recover dues from defaulting borrowers.
- Recapitalization of Banks: The government has injected capital into public sector banks to strengthen their balance sheets and improve their ability to handle bad loans.
- Asset Reconstruction Companies (ARCs): Encouraged the creation of ARCs to buy bad loans from banks and attempt to recover the value.
- Prudential Norms and Stress Testing: Strengthening regulations and stress-testing banks to better manage credit risk.
- Public Sector Bank Consolidation: Merging weak public sector banks to create stronger, more resilient institutions.
- Loan Restructuring: Allowing borrowers to restructure loans under certain conditions to prevent defaults and ease repayment.
Concluding Remarks
- Bad loans continue to be a significant challenge in the financial sector, requiring coordinated efforts from banks, regulators, and policymakers.
- By implementing strong credit appraisal, effective monitoring, and strict recovery mechanisms, financial institutions can manage their loan portfolios better and ensure long-term stability.
- Addressing bad loans will be essential for maintaining the health and resilience of the financial system as the global economy evolves.
Source: IE