Trend Analysis of Non-Performing Assets (NPAs)

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    Recently ,it has been observed that Probing the links between twin balance sheet crises and external commodity shocks could lead to a better understanding of the Non-Performing Asset (NPA)problem.

    About Non-Performing Asset (NPA)

    • NPAs are loans or advances made by a financial institution, on which both principal or interest is unpaid for a specified period of time. 
      • Thus, NPAs are those loans that have ceased to generate income for the bank
    • They are recorded on a bank’s balance sheet after a prolonged period of non-payment by the borrower.
    • NPAs can be classified as a substandard asset, doubtful asset, or loss asset, depending on the length of time overdue and probability of repayment.

    Data Analysis 

    • The Indian banking system faced a significant challenge after 2011 with an increasing quantum of non-performing assets (NPAs). 
      • NPAs began to rise in 2011 and peaked at 11.18 per cent in the fiscal year that ended in 2018. 
      • As expected, this rise occurred with the deterioration of the balance sheets of non-financial firms, and this twin balance sheet crisis contributed significantly to the deceleration of growth in the late 2010s.
    • Recent data : As per Reserve Bank of India (RBI) data, recovery made by public sector banks (PSBs) during the financial year as a percentage of gross non-performing assets (NPAs) as on beginning of the financial year (FY) has improved from 11.33% in FY 2017-18, to 13.52% in FY 2018-19, to 14.69% in FY 2019-20.
      • Gross non performing assets (GNPAs) of scheduled commercial banks (SCBs) fell to a six-year low of 5.9 per cent in March 2022 and could fall further to 5.3 per cent by March 2023, according to the Financial Stability Report of the Reserve Bank of India (RBI).

    Causes for NPAs

    • Several factors – including prevailing macroeconomic conditions, sectoral issues, global business environment, delayed recognition of stress by banks, aggressive lending during upturns, improper risk pricing and poor credit underwriting – were attributed towards NPA build-up
    • Poor management and governance issues in such banks stemming from government ownership have been cited as the major causes of the crisis.
    •  Most of NPAs arose due to defaults by private sector non-financial firms.
    • A large proportion of NPAs arose because of exogenous shock 

    Issues /Concerns 

    • Disproportionate share NPAs: Public sector banks have a disproportionate share of NPAs. 
      • A large fraction of the difference between NPAs in the public and private sector banks arose due to differences in their business models.
        • Because at the beginning of the 2010s, public sector banks had significantly higher exposure (percent of total loans) to commodity-sensitive sectors such as iron and steel and textiles compared to private sector banks.
    • Profitability issues  : The banks are required to provision for bad loans out of their operating income.The concerned bank becomes less profitable because it has to use some of its profits from other loans to make up for the loss on the bad loans. 
    •  Risk-averse: Banks hesitate from extending loans to business ventures that may remotely appear risky for the fear of aggravating an already high level of non-performing assets (or NPAs).

    Measures taken 

    • Government and RBI (Reserve Bank of India) regularly issue guidelines and have taken several initiatives aimed at resolution of long-standing stressed assets on the books of banks as well as timely identification and recognition of stress immediately upon default and take corrective action for mitigation of the same
      • These measures complement the statutory provisions already available to lenders for recovery and resolution, including, the Recovery of Debts and Bankruptcy Act, 1993, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and Insolvency & Bankruptcy Code, 2016 (IBC).
    • The Finance Minister announced that the National Asset Reconstruction Company (NARCL) along with the India Debt Resolution Company (IDRCL) will take over the first set of bad loans from banks and try to resolve them. 

    Suggestions

    • Instituting use of third party data sources in PSBs for comprehensive due diligence across data sources at the sanction stage itself, to mitigate risk on account of misrepresentation and fraud;
    • Incentivising regular repayment through linking of eligibility for the next cycle of working capital loan with an enhanced limit with on-time or early repayment of existing loan under PM SVANidhi scheme

    Mains Practise Question 

    [Q] Do you agree that there is a declining trend in the stock of Non-Performing Assets (NPAs).Give reasons in support of your answer.

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