Non-Performing Assets (NPA): How serious is India’s bad loan problem?
Last updated on October 10, 2023 by ClearIAS Team
In the best interest of our readers, we have come up with a comprehensive post on NPAs, in which analyze the entire issue in detail.
We will also list out the steps taken by the Government and RBI to counter the situation.
Also read: Infrastructure and Economic Development
Table of Contents
What is a Non-Performing Asset (NPA)?
You may note that for a bank, the loans given by the bank is considered as its assets. So if the principle or the interest or both the components of a loan is not being serviced to the lender (bank), then it would be considered as a Non-Performing Asset (NPA).
Any asset which stops giving returns to its investors for a specified period of time is known as Non-Performing Asset (NPA).
Generally, that specified period of time is 90 days in most of the countries and across the various lending institutions. However, it is not a thumb rule and it may vary with the terms and conditions agreed upon by the financial institution and the borrower.
An example of NPA:
Suppose the State Bank of India (SBI) gives a loan of Rs. 10 crores to a company (Eg: Kingfisher Airlines). Consider that they agreed upon for an interest rate of say 10% per annum. Now suppose that initially everything was good and the market forces were working in support to the airline industry, therefore, Kingfisher was able to service the interest amount. Later, due to administrative, technical or corporate reasons suppose the company is not able to pay the interest rates for 90 days. In that case, a loan given to the Kingfisher Airlines is a good case for the consideration as NPA.
Also read: Loan Loss Provisions
NPAs definition by Reserve Bank of India (RBI)
An asset, including a leased asset, becomes nonperforming when it ceases to generate income for the bank.
Technical definition by RBI on NPA on different cases
NPA is a loan or an advance where…
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Interest and/ or instalment of principal remain overdue for a period of more than 90 day s in respect of a term loan.
The account remains ‘ out of orde r’ in respect of an Overdraft/Cash Credit (OD/CC).
The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.
The instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops.
The instalment of principal or interest thereon remains overdue for one crop season for long duration crops .
The amount of liquidity facility remains outstanding for more than 90 days , in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006.
In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.
Categories of Non-Performing Assets (NPAs)
Based upon the period to which a loan has remained as NPA, it is classified into 3 types:
How serious is India’s NPA issue?
More than Rs. 7 lakh crore worth loans are classified as Non-Performing Loans in India. This is a huge amount.
The figure roughly translates to near 10% of all loans given.
This means that about 10% of loans are never paid back, resulting in substantial loss of money to the banks.
When restructured and unrecognised assets are added the total stress would be 15-20% of total loans.
NPA crisis in India is set to worsen.
Restructuring norms are being misused.
This bad performance is not a good sign and can result in crashing of banks as happened in the sub-prime crisis of 2008 in the United States of America.
Also, the NPA problem in India is worst when comparing other emerging economies in BRICS.
What can be the possible reasons for NPAs?
Diversification of funds to unrelated business/fraud.
Lapses due to diligence.
Busines losses due to changes in business/regulatory environment.
Lack of morale, particularly after government schemes which had written off loans.
Global, regional or national financial crisis which results in erosion of margins and profits of companies, therefore, stressing their balance sheet which finally results into non-servicing of interest and loan payments. (For example, the 2008 global financial crisis).
The general slowdown of entire economy for example after 2011 there was a slowdown in the Indian economy which resulted in the faster growth of NPAs.
The slowdown in a specific industrial segment , therefore, companies in that area bear the heat and some may become NPAs.
Unplanned expansion of corporate houses during the boom period and loan taken at low rates later being serviced at high rates, therefore, resulting in NPAs.
Due to mal-administration by the corporates, for example, willful defaulters.
Due to misgovernance and policy paralysis which hampers the timeline and speed of projects, therefore, loans become NPAs. For example the Infrastructure Sector.
Severe competition in any particular market segment. For example the Telecom sector in India.
Delay in land acquisition due to social, political, cultural and environmental reasons.
A bad lending practice which is a non-transparent way of giving loans.
Due to natural reasons such as floods, droughts, disease outbreak, earthquakes, tsunami etc.
Cheap import due to dumping leads to business loss of domestic companies. For example the Steel sector in India.
What is the impact of NPAs?
Lenders suffer a lowering of profit margins.
Stress in banking sector causes less money available to fund other projects, therefore, negative impact on the larger national economy.
Higher interest rates by the banks to maintain the profit margin.
Redirecting funds from the good projects to the bad ones.
As investments got stuck, it may result in it may result in unemployment.
In the case of public sector banks, the bad health of banks means a bad return for a shareholder which means that the government of India gets less money as a dividend. Therefore it may impact easy deployment of money for social and infrastructure development and results in social and political cost .
Investors do not get rightful returns.
Balance sheet syndrome of Indian characteristics that is both the banks and the corporate sector have stressed balance sheet and causes halting of the investment-led development process.
NPAs related cases add more pressure to already pending cases with the judiciary .
What are the various steps taken to tackle NPAs?
NPAs story is not new in India and there have been several steps taken by the GOI on legal, financial, policy level reforms. In the year 1991, Narsimham committee recommended many reforms to tackle NPAs. Some of them were implemented.
The Debt Recovery Tribunals (DRTs) – 1993
To decrease the time required for settling cases. They are governed by the provisions of the Recovery of Debt Due to Banks and Financial Institutions Act, 1993. However, their number is not sufficient therefore they also suffer from time lag and cases are pending for more than 2-3 years in many areas.
Credit Information Bureau – 2000
A good information system is required to prevent loan falling into bad hands and therefore prevention of NPAs. It helps banks by maintaining and sharing data of individual defaulters and willful defaulters.
Lok Adalats – 2001
They are helpful in tackling and recovery of small loans however they are limited up to 5 lakh rupees loans only by the RBI guidelines issued in 2001. They are positive in the sense that they avoid more cases into the legal system.
Compromise Settlement – 2001
It provides a simple mechanism for recovery of NPA for the advances below Rs. 10 Crores. It covers lawsuits with courts and DRTs (Debt Recovery Tribunals) however willful default and fraud cases are excluded.
SARFAESI Act – 2002
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 – The Act permits Banks / Financial Institutions to recover their NPAs without the involvement of the Court, through acquiring and disposing of the secured assets in NPA accounts with an outstanding amount of Rs. 1 lakh and above. The banks have to first issue a notice. Then, on the borrower’s failure to repay, they can:
Take ownership of security and/or
Control over the management of the borrowing concern.
Appoint a person to manage the concern.
Further, this act has been amended last year to make its enforcement faster.
ARC (Asset Reconstruction Companies)
The RBI gave license to 14 new ARCs recently after the amendment of the SARFAESI Act of 2002. These companies are created to unlock value from stressed loans. Before this law came, lenders could enforce their security interests only through courts, which was a time-consuming process.
Corporate Debt Restructuring – 2005
It is for reducing the burden of the debts on the company by decreasing the rates paid and increasing the time the company has to pay the obligation back.
5:25 rule – 2014
Also known as , Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries . It was proposed to maintain the cash flow of such companies since the project timeline is long and they do not get the money back into their books for a long time, therefore, the requirement of loans at every 5-7 years and thus refinancing for long term projects.
Joint Lenders Forum – 2014
It was created by the inclusion of all PSBs whose loans have become stressed. It is present so as to avoid loan to the same individual or company from different banks. It is formulated to prevent the instances where one person takes a loan from one bank to give a loan of the other bank.
Mission Indradhanush – 2015
The Indradhanush framework for transforming the PSBs represents the most comprehensive reform effort undertaken since banking nationalization in the year 1970 to revamp the Public Sector Banks (PSBs) and improve their overall performance by ABCDEFG.
B-Bank Board Bureau : The BBB will be a body of eminent professionals and officials, which will replace the Appointments Board for the appointment of Whole-time Directors as well as non-Executive Chairman of PSBs
C-Capitalization: As per finance ministry, the capital requirement of extra capital for the next four years up to FY 2019 is likely to be about Rs.1,80,000 crore out of which 70000 crores will be provided by the GOI and the rest PSBs will have to raise from the market.
D-DEstressing: PSBs and strengthening risk control measures and NPAs disclosure.
E-Employment: GOI has said there will be no interference from Government and Banks are encouraged to take independent decisions keeping in mind the commercial the organizational interests.
F-Framework of Accountability: New KPI(key performance indicators) which would be linked with performance and also the consideration of ESOPs for top management PSBs.
G-Governance Reforms : For Example, Gyan Sangam, a conclave of PSBs and financial institutions. Bank board Bureau for transparent and meritorious appointments in PSBs.
Strategic debt restructuring (SDR) – 2015
Under this scheme banks who have given loans to a corporate borrower gets the right to convert the complete or part of their loans into equity shares in the loan taken company. Its basic purpose is to ensure that more stake of promoters in reviving stressed accounts and providing banks with enhanced capabilities for initiating a change of ownership in appropriate cases.
Asset Quality Review – 2015
Classify stressed assets and provisioning for them so as the secure the future of the banks and further early identification of the assets and prevent them from becoming stressed by appropriate action.
Sustainable structuring of stressed assets (S4A) – 2016
It has been formulated as an optional framework for the resolution of largely stressed accounts . It involves the determination of sustainable debt level for a stressed borrower and bifurcation of the outstanding debt into sustainable debt and equity/quasi-equity instruments which are expected to provide upside to the lenders when the borrower turns around.
Insolvency and Bankruptcy code Act-2016
It has been formulated to tackle the Chakravyuaha Challenge ( Economic Survey ) of the exit problem in India. The aim of this law is to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner and for maximization of value of assets of such persons and matters connected therewith or incidental thereto.
Pubic ARC vs. Private ARC – 2017
This debate is recently in the news which is about the idea of a Public Asset Reconstruction Companies (ARC) fully funded and administered by the government as mooted by this year’s Economic Survey Vs. the private ARC as advocated by the deputy governor of RBI Mr. Viral Acharya. Economic survey calls it as PARA (Public Asset Rehabilitation Agency) and the recommendation is based on a similar agency being used during the East Asian crisis of 1997 which was a success.
Bad Banks – 2017
Economic survey 16-17 , also talks about the formation of a bad bank which will take all the stressed loans and it will tackle it according to flexible rules and mechanism. It will ease the balance sheet of PSBs giving them the space to fund new projects and continue the funding of development projects.
The need of the hour to tackle NPAs is some urgent remedial measures. This should include:
Technology and data analytics to identify the early warning signals.
Mechanism to identify the hidden NPAs.
Development of internal skills for credit assessment.
Forensic audits to understand the intent of the borrower.
Article by: Nishant Raj. The author is an IIT Kharagpur Alumnus.
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Reader Interactions
June 11, 2017 at 5:13 am
Very Deeply Elaborated with Details
January 30, 2018 at 8:24 pm
This is “THE BASE” of Current economy, for technical background people.
June 29, 2018 at 1:13 am
In mission indradhnush It’s E for Empowerment not employment… Correct me if I am wrong
November 30, 2018 at 6:09 pm
January 2, 2019 at 11:08 am
Please seen that pic frnd it has represented the correct form..
February 27, 2020 at 10:25 am
Strict action should be taken against froud companies and hereafter loan amount should be deducted automatically from company account.Company and related person should not be allowed to open an account in other bank.Cash tranziction should be not be allowed.
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Essay On NPA In Indian Banks | NPA Essay In 250+ Words Step by Step
Essay On NPA In Indian Banks | NPA Essay In 250+ Words
Hello, Friend, In this post “ Essay On NPA In Indian Banks | NPA Essay In 250+ Words “, We will read about NPA, Types of NPA, And its Solution as an Essay With In-depth Analysis.
Note:- This “ Essay On NPA In Indian Banks ” Is in 500+ Words based on deep research, It’s helpful for all students.
Let’s Start…
Essay On NPA In Indian Banks | NPA Essay
Introduction.
The common man of the country deposits his hard-earned money in banks . Banks give this accumulated capital as a loan to needy people and industrialists.
While giving a loan , it is expected that the person or industrialist should return this money to banks through EMI.
But when this loan does not come back to the bank, then it goes into the category of NPA . In simple words, it is a submerged debt of Banks .
According to banking rules , when the EMI, Principal amount or interest of a loan does not come within 90 days of the due date, it is called NPA.
That is, when a bank stops getting returns from a loan, then it becomes an NPA or bad loan for the bank.
What is NPA?
The Non-Performing Asset is a classification used by financial resources that deals with the non-repayment of debt . When a borrower fails to pay interest or principal till 90 days, the loan given to him is treated as NPA, and Banks show such loans in the NPA column of their balance sheet.
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Three Main Types of NPAs: –
Substandard asset, doubtful asset.
When a loan remains NPA for 12 months or less, it is called Sub-Standard Asset . In such a loan, the total assets or collateral of the borrower is not so much that the entire dues can be recovered from it.
When a debt remains subordinated for 12 months, it falls into the category of Doubtful Asset . The possibility of recovery of the entire amount of such loan is very less.
When the bank assumes that the possibility of recovery of any of its debts is negligible or is over, then it is called a Loss Asset .
How to Overcome the Problem of NPA?
The government is constantly making efforts to resolve the NPA cases in public sector banks.
There are actually two types of borrowers under the NPA . First, those who are unable to pay arrears due to domestic and global recession or other reasons.
And others who do not want to intentionally repay the loans of banks . The government has taken measures to deal with the defaulters of both categories.
Due to the economic downturn, the government has made several schemes for the loans which are not being paid.
Similarly, the central government has made available Rs 70000 crore capital to government banks in 3 years and if required, more capital will be made available.
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To make the recovery proceedings more effective, the “ SARFAESI Act ” and Debt Recovery Tribunal Act have been amended.
To bring transparency, banks have been asked to issue a list of borrowers whose debts have been waived.
Stringent action should be taken against the traitors who did not return the loan intentionally so that such incidents do not happen in the future.
In order to help the farmers, their debts have been restructured and the debt of farmers has also been waived in some states.
In addition, the Bankruptcy Code 2016 has been introduced. With its implementation, unnecessary delays in the recovery of loans and losses arising from it will be avoided.
In the event of failure to repay the loan, the company will be given an opportunity to repay its loan within a certain time or declare itself bankrupt. Similarly, if anyone is found guilty of debt , then there is a provision of punishment of 5 years .
Conclusion (Essay On NPA In Indian Banks)
Banks are the mainstay of any economy. Banks are not only responsible for the steady and balanced flow of capital in the market, but they also have the responsibility of the correct operation and management of the system .
If the banking system does not discharge its duties with full devotion, then its direct effect is visible on the credit of the bank as well as the economy of the country .
It is clear from all these things that, if no hard decision is taken in respect of these problems in time, it will not be easy to emerge from its effects.
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NPAs in India's banks: trends and determinants
Journal of Money and Business
ISSN : 2634-2596
Article publication date: 12 September 2023
Issue publication date: 1 December 2023
This paper aims to analyse trends and determinants of NPAs in India's banks. It has empirically examined the bank-specific determinants of NPAs.
Design/methodology/approach
An FE panel estimation of a sample of 44 banks was carried out for the post-crisis time period, from 2010 to 2020 to identify the bank-specific determinants of NPAs. The sample of 44 banks includes 20 PSBs, 19 private banks and 5 foreign banks. Separate FE estimation was also carried out to identify the drivers of NPAs in PSBs.
The determinant of NPAs during the post-crisis period suggests that faulty earning management and deterioration in loan quality have resulted in high NPAs in India's banks. The result is similar for PSBs as well.
Research limitations/implications
The findings of the study suggest that the banks, especially the Public Sector Banks (PSBs) need to revisit their earning management strategies to maximise income and improve their loan quality in order to reduce the incidence of loan failure.
Originality/value
The paper contributes by empirically analysing the determinants of NPAs during the recent decade, between 2010 and 2020. Separate estimations have been carried out to understand whether the drivers of NPAs differ in the case of PSBs.
India's banks
Loan failure
Das, S.K. (2023), "NPAs in India's banks: trends and determinants", Journal of Money and Business , Vol. 3 No. 2, pp. 147-158. https://doi.org/10.1108/JMB-09-2022-0043
Published in Journal of Money and Business . Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode
1. Introduction
In recent decades, India's banking sector has experienced two episodes of crisis with respect to the nonperformance of their advances or loans, one in the mid-1990s and the other which has been ongoing since 2014–2015. While there seem to be a few similarities between the two phases of the crisis, the current non-performing advances (NPA) crisis, however, is more severe in terms of the volume of failed loans turning into NPAs, thereby affecting the financial health of the banks. The growing incidence of loan failures is a major source of stress for the banking system. In terms of bank groups by ownership, it is largely the public sector banks (PSBs) that are severely affected vis-à-vis their private counterparts during both periods. However, the current phase appears to be more severe for both the PSBs and the private banks due to the higher volume of accumulated NPAs, though NPAs in the private banks are less than that of their public counterparts. The accumulation of NPAs can negatively affect the macroeconomic performance though it has negative effect on lending activities in the economy ( Serrano, 2021 ). A significant increase in NPLs is likely to have a destabilising effect on the banking system, thereby affecting tier balance sheets and overall financial health ( Park and Shin, 2021 ; Das and Uppal, 2021 ).
There can be several factors that are responsible for high NPAs during the last decade in India's banks. From the point of view of a bank, the drivers of credit risks can be internal and external. While internal factors are those which are internal to banking operations, the external factors are exogenous in nature. Major macroeconomic determinants of NPAs include adverse economic conditions, weak banking regulations and supervision, inadequate corporate governance and weak market monitoring ( Keeton and Morris, 1987 ; Salas and Saurina, 2002 ; Espinoza and Prasad, 2010 ; Nkusu, 2011 ; Lokare, 2014 ; Samantaraya, 2016 ). On the other hand, bank-specific factors which drive NPAs include operational inefficiency, quality of lending, earning management and capital adequacy ( Keeton and Morris, 1987 ; Berger and Deyoung, 1997 ; Kwan and Eisenbeis, 1997 ; Salas and Saurina, 2002 ; Muniappan, 2002 ; Arora, 2013 ; Dhar and Bakshi, 2015 ; Patra and Padhi, 2016 ; Bawa et al. , 2019 ; Ozili, 2019 ).
The paper analyses the trends and determinants of NPAs in India's banks, with emphasis on the post-financial crisis period. There are very few studies which have analysed the bank-specific drivers of the current phase of NPAs in India's banks. Accordingly, bank-specific factors or drivers of NPAs in India's banks have been empirically estimated for the post-crisis period (2010–2020). Most of the studies that have empirically the drivers of the current phase of NPAs in banks in India have emphasised the role of macroeconomic factors in the current NPA crisis. The present paper contributes to the literature by exploring the bank-specific determinates of NPAs and explains the current NPAs crisis through the bank-specific variables or determinants.
The paper spreads over seven sections. The introduction to the paper has been presented in Section1. The trend and composition of NPAs have been analysed in Section 2. A review of literature related to determinants of NPAs has been presented in Section 3. Data and methodology, including variables and estimation model, has been discussed in Section 4. The empirical results have been presented in Section 5. It has been followed by a discussion of results in Section 6. Finally, Section 7 provides the concluding remarks.
2. NAPs in India's banks
The current crisis in India's banking system is largely due to the unprecedented accumulation of non-performing loans. All banks, irrespective of their ownership, have registered a substantial volume of bad loans, though the incidence of NPA is prevalent in the PSBs. The widespread prevalence of bald loans came to light with the conduct of an asset quality review (AQR) in 2015 by the RBI. The ratio of nonperforming advances to total advances (GNPA ratio) of the Scheduled Commercial Banks has risen significantly to a mammoth 11.2% in 2017–18 ( Table 1 ). The NPA figures of the PSBs increased significantly, from 2% in 2008–09 to 14.6% in 2017–2018. Similarly, the GNPA ratio of the private banks increased to 5.45% in 2019–2020. The foreign banks also recorded substantial rise in their NPA figures. However, recent data suggests that it declined in later years.
The GNPA ratio of PSBs shows considerable variation among the banks. The average GNPA ratio of different time periods has been analysed to identify banks with high exposure to bad loans ( Table 2 ). The average GNPA ratio of most of the PSBs was moderately low, ranging from about 1.5% to about 4.5% between 2009 and 2014. The GNPA ratio is found to be significantly high for most of the banks during 2015–20. The average NPA figures during this period varied from 7.1% GNPA ratio (Indian Bank) to 20.3% (Indian Overseas Bank). Following the AQR exercise of the RBI, the NPA figures of PSBs spiked up during this period.
The average GNPA ratio of private banks as a whole does not suggest any deep crisis, though NPA figures have increased between 2015 and 2020 ( Table 2 ). Most of the leading private banks did not experience a high GNPA ratio except for ICICI Bank. The average GNPA ratio of the ICICI Bank between 2015 and 2020 stood at 7.6%, which is the highest among leading private banks. The Axis Bank averaged a GNPA ratio of 4.7% between 2015 and 2020, which is higher than that of several private banks. It is interesting to note that another leading private bank, the HDFC Bank, did not record a rise in its GNPA ratio. On the contrary, it saw a decline in its average GNPA ratio during the same time period.
3. Determinants of NPAs: review of literature
Broadly, from the perspective of banks, the determinants of NPAs can be classified into two categories – internal and external factors. The internal factors are those which are internal to banking operation. On the other hand, the external factors are those that are exogenous to bank's operation, however, can influence the loan outcome. It includes macroeconomic factors, industry-specific factors and regulatory factors. Major determinants of NPAs that have been pointed out in literature include adverse economic conditions, weak banking regulations and supervision, inadequate corporate governance and weak market monitoring. Several studies have concluded the critical role of macroeconomic factors in driving NPAs ( Keeton and Morris, 1987 ; Salas and Saurina, 2002 ; Espinoza and Prasad, 2010 ; Nkusu, 2011 ; Lokare, 2014 ; Samantaraya, 2016 ). Along with macroeconomic and bank-level factors, financial development and structure of the financial sector have been taken into consideration while explaining NPLs. A study by Ozili (2019) looks into the role of financial development in the persistence of NPLs. His cross-country analysis suggests that NPL increases with an increase in financial development, due to weak supervision in the process of financial intermediation ( Ozili, 2019 ). However, the present study restricts its analysis with a focus on the bank-specific determinants of NPAs.
Several studies analyzing bank-specific determinants of NPAs or credit risks have been undertaken in different countries, including India ( Keeton and Morris, 1987 ; Berger and Deyoung, 1997 ; Kwan and Eisenbeis, 1997 ; Salas and Saurina, 2002 ; Muniappan, 2002 ; Arora, 2013 ; Dhar and Bakshi, 2015 ; Patra and Padhi, 2016 ; Bawa et al. , 2019 ). Berger and Deyoung (1997) in their study of commercial banks in the USA, between 1985 and 1994 found that operational inefficiency as reflected in low credit appraisal skills and practices leads to high NPAs. Low-cost efficiency is a sign of poor management practices which could happen if managers do not efficiently monitor and control their operating expenses. If they do not practice adequate loan underwriting, monitoring and control, it can result in higher NPAs ( Berger and Young, 1997 ). Kwan and Eisenbeis (1997) found that banks with higher capital usually achieve greater operational efficiency and are likely to take less credit risks vis-à-vis banks with lower capital. Therefore, banks with higher capital are likely to have lower NPAs. Salas and Saurina (2002) found that when a bank enters a new geographical market, it could face adverse selection problems. It is because as the banks do not have past experience in a sector or geographical region in which it enters, then the problem of adverse selection problem may lead to a higher probability of NPA. They found the degree of competition among banks is another factor that can increase problem loans. Higher competition increases manager's incentive to take risks by deteriorating bank's interest margin and so they would be tempted to lend to customers with lower credit quality, which could translate into higher problem loans. Therefore, higher competition could lead to higher NPAs ( Salas and Saurina, 2002 ).
Several studies have been undertaken in recent decades to explain credit risks in Indian banks. A study of PSBs by Ranjan and Dhal (2003) suggests that credit terms and macroeconomic conditions did influence credit risks among the PSBs. Similarly, a study by Das and Ghosh (2007) , while analysing credit risks, concluded that pro-cyclicality and deteriorating capital adequacy ratio are responsible for credit risks among banks in India. A study of PSBs by Dhar and Bakshi (2015) for the period, from 2001 to 2005 reported that bank-specific factors like interest income (net interest margin) and ROA did significantly influence loan failures. A study by Patra and Padhi (2016) found a significant association between capital adequacy ratio and ROA. Similarly, low quality of credit has been attributed as a major reason behind high credit risks in banks in India ( Gaur and Mohapatra, 2020 ; Arora, 2013 ). A study by Muniappan (2002) suggests that negligent supervision following the detection and prevention of diversion of funds post credit disbursal is a major factor leading to higher NPAs.
4. Data and methodology
A sample of 44 Indian commercial banks have been drawn for the purpose of estimation of determinants of NPAs. The sample of 44 banks includes 20 PSBs, 19 private banks and 5 foreign banks. The estimation has been done for the post-crisis time period, from 2010 to 2020. Data for the sample of 44 banks has been collected from the publications of the Reserve Bank of India – Statistical Tables Relating Banks in India and Handbook of Statistics on Indian Economy.
4.2 Variables
The focus of this paper is to analyse the drivers of NPAs which are internal to the banks and their operation. In the estimation, NPA is the dependent variable which is determined by a set of regressors. The independent variables include Operational (in)Efficiency (OC), Non-Interest Income (NII), Interest Income (II), Profitability (ROA), Capital Adequacy (CAR), Loan to sensitive sectors (LSS) and Secured Lending (SL).
In this study, the net NPAs have been used a measure of NPAs. The net NPAs have been chosen as they reflect the actual burden on the banks ( Prasanna et al. , 2014 ). The NNPA rate is a ratio of net NPA to total advances by the banks in percentage term. A similar measure has been employed in studies by Das and Uppal (2021) , Bawa et al. (2019) and Prasanna et al. (2014) .
4.2.2 Operating efficiency
Operational efficiency which reflects the management quality can significantly determine the failure or success of a loan. Poor or inadequate management will result in higher NPAs owing to poor management practices ( Berger and Deyoung, 1997 ; Ghosh, 2014 ). In this study, operational efficiency has been measured as the ratio of operational income to total interest income in percentage terms. This measure was followed in a study by Das and Uppal (2021) .
4.2.3 Non-interest income
Non-interest income reflects the diversification of income ( Ghosh, 2014 ). It is the income of the banks that does not arise from lending activities. The major sources of non-interest income include profit originating from the sale of investment securities, foreign exchanges, service charges, commissions and fees. In this study, it is measured as non-interest income as a ratio of total income in percentage terms. Literature suggests that diversification of earning and NPA is likely to be exhibit negative association as banks are unlikely to undertake risky lending ( Bawa et al. , 2019 ; Ghosh, 2014 ; Ozili, 2019 ). On the other hand, they can also exhibit positive associations due to the fact that with diversified income, banks tend to compromise with credit standards in terms of assessment of loan proposals, thereby resulting in higher NPAs.
4.2.4 Interest income
Interest income which reflects the earning quality of banks is the net interest margin. Literature suggests a negative association between interest income and NPAs. This is owing to the fact that with falling interest income, banks may undertake risky lending in order to compensate their income by earning more interest from their lending. This is likely to result in an increase in NPAs ( Dhar and Bakshi, 2015 ; Salas and Saurina, 2002 ).
Return on Assets (ROA) reflects on the earning management of the banks. It is expected that ROA and NPA are likely to exhibit a negative relationship ( Dimitrios et al. , 2016 ; Godlewski, 2004 ; Salas and Saurina, 2002 ). Falling profitability (ROA) due to declining interest earning might result in higher NPAs, as the banks are very likely to undertake risky lending.
4.2.6 Capital adequacy
Capital adequacy ratio reflects the risk-absorbing capacity of a bank. A well-capitalised bank with a higher capital adequacy ratio is likely to absorb the risks better. Hence, capital adequacy ratio and NPA exhibit a negative relationship, which suggests that the higher the capital adequacy ratio lower the NPA rate ( Makri et al. , 2014 ; Bardhan and Mukherjee, 2013 ; Ozili, 2019 ).
4.2.7 Loan to sensitive sectors
The composition of the loan portfolio of the banks is likely to affect the rate of NPA ( Ghosh, 2014 ). Literature suggests that both these variables exhibit a positive relationship with NPA ( Dhar and Bakshi, 2015 ). It implies higher the share of lending to sensitive sectors in a bank's lending portfolio higher be NPA.
4.2.8 Secured loans
A higher proportion of loans backed by collaterals in bank's lending portfolio can affect NPAs in both ways. Some studies suggest that the higher the proportion of secured loans, the lower the NPA rate ( Salas and Saurina, 2002 ; Bawa et al. , 2019 ; Boot and Thakor, 1994 ). On the other hand, another set of studies suggest that the higher the proportion of secured loans backed by collaterals, the higher will be NPAs due to higher credit risks. This is because banks tend to compromise with their credit standards in the presence of collateral, leading to higher credit risks ( Berger and Udell, 1990 , 1995 ; Lis et al. , 2000 ; Jiménez and Saurina, 2003 ).
4.3 Estimation model
The panel data estimation has been carried out to examine the bank-specific determinants of NPAs in banks during the post-financial crisis period. The determinants of NPAs have been estimated by using the following functional form. (1) N e t N o n − P e r f o r m i n g A s s e t i , t = β 0 + β 1 O p e r a t i n g C o s t i , t + β 2 I n t e r e s t I n c o m e i , t + β 3 N o n − I n t e r e s t I n c o m e i , t + β 4 C a p i t a l A d e q u a c y i , t + β 5 L o a n s t o S e n s i t i v e S e c t o r s i , t + β 6 R e t u r n o n A s s e t s i , t + β 7 S e c u r e d L o a n s i , t + ε i , t where, i = bank, 1, ….n, and t = time, 1, ….,n and ε i , t is the error term.
In equation (1), seven bank-specific determinants of NPAs have been presented that reflect their operational efficiency, earning management, loan quality and capital adequacy. The present study will employ both the Fixed and Random approach to empirically estimate the determinants of NPAs in India's banks.
The FE model that has been employed to estimate the determinants of NPAs is as per the following: (2) N N P A i , t = C + β 1 O C i , t + β 2 I I i , t + β 3 N I I i , t + β 4 C R A i , t + β 5 L S S i , t + β 6 R O A i , t + β 7 S L i , t + µ i + u i , t where i = bank, 1, ….45, and t = time, 1, ….,10.
In the above equation (2) , the dependent variable N N P A i , t is determined by a set of explanatory variables. The unobserved individual bank effect is µ i , and the random error is, u i , t . It is assumes that the above explanatory variables are uncorrelated with the error term u i , t , which is normally distributed, u i , t ∼N(0, σ u 2 ), where σ u 2 is > 0. The benefit of using FE model is that it analyses the impact of time-variant variables ( Das and Uppal, 2021 ). At the same time, it also controls for all time-invariant heterogeneity among the sample banks’ characteristics ( Torres-Reyna, 2007 ).
Along with the above FE model, the following RE model (3) has been employed to estimate the factors that affect NPAs in India's banks. (3) N N P A i , t = C + β 1 O C i , t + β 2 I I i , t + β 3 N I I i , t + β 4 C A R i , t + β 5 L S S i , t + β 6 R O A i , t + β 7 S L i , t + µ + u i , t + ε i , t In the above equation (3) , it is assumed that the error term is uncorrelated with the explanatory variables. The benefit of estimating the RE model is that we can generalise the inferences beyond the drawn sample ( Torres-Reyna, 2007 ).
5.1 All banks
The summary statistics of the variables which have been used in estimating the determinants of NPAs of a sample of 44 banks are presented in Table 3 . The descriptive statistics of the dependent and independent variables have been presented for the period, from 2010 to 2020. The results show that the dependent variable NNPA ranges from 0.10 (min) to 16.7 (max) with a mean value of NNPA of 2.85. The minimum and maximum values of the explanatory variables demonstrate variability, ranging from low to high. The mean and standard deviation values suggest variation between the two.
The correlation coefficients of the variables that have been used in the regression analysis is presented in Table 4 . The result shows that it is free from the problem of multicollinearity.
Equation 2 and 3 have been estimated to identify the drivers of NPAs in banks in India. The determinants of NPAs have been estimated for the time period from 2010 to 2020 for 44 commercial banks. The estimated results of the FE model suggest that NPA is negatively associated with operating cost (OC) for the sample of banks ( Table 5 ). However, their association is not statistically significant. A negative association suggests that operating cost did not drive NPAs. Interest income (II) is also negatively associated with NPAs. The non-interest income (NII) is found to be positively associated with NPAs and the relationship is statistically significant. Return on Assets (ROA) which reflects the earning management of the banks exhibit an inverse relationship with NPAs and the association is found to be statistically significant. Secured loans (SL) exhibit a positive association with NPAs and it is found to be statistically significant. Similarly, the estimates of the RE model suggest that operating cost and ROA are negatively associated with NPAs and their associations are statistically significant. NII exhibit a positive relationship with NPAs and their association is statistically significant. The result of the Hausman test suggests that the FE estimate is appropriate for the drawn sample as the estimated “ p ” value is greater than 0.05 ( Table 5 ).
The incidence of loan failures is rampant in PSBs. To explore the drivers of bad loans in PSBs, the determinants of NPAs in PSBs have been estimated with a set of variables for the time period, from 2010 to 2020. The summary statistics of the dependent and independent variables are presented in Table 6 . The descriptive statistics suggest variability, with minimum and maximum numbers ranging from low to high. Also, the mean and standard deviation suggest variability of the data. The correlation coefficient of the variables used in the regression analysis has been estimated to check the presence of multicollinearity. The estimated result suggests that it is free from the problem of multicollinearity ( Table 7 ).
The determinants of NPAs in PSBs have been estimated to explore the drivers of loan failures. Both the FE and RE models have been estimated to identify the drivers of NPAs in PSBs ( Table 8 ). The estimates of the FE model suggest that II and ROA exhibit a negative relationship with NPAs. And their association is found to be statistically significant. SL is found to be positively associated with NPAs. On the other hand, the RE estimates suggest that while II exhibit a negative relationship with NPAs, SL exhibits a positive relationship. Their association is statistically significant. With respect to the appropriateness of the estimate, the Hausman test result suggests that the FE model is appropriate for the drawn sample.
6. Discussion
The regression results of all banks suggest that three key factors that have affected NPAs in banks – Non-Interest Income (NII), earning management (ROA) and loan quality (SL). NII is found to be positively associated with NPAs, which suggests that with an increase in non-interest income, banks have undertaken risky lending. And, higher risky lending has resulted in high NPAs. The estimated results exhibit an inverse relationship between ROA and NPAs. Their negative association suggests that deteriorating interest income resulted in risky lending by banks in order to maximise income which in turn resulted in high NPAs. A study by Prasanna et al . (2014) in their study on determinants of NPAs in India's banking system between 2000 and 2012 suggests a similar relationship. Secured loans as a percentage of total lending are found to be positively associated with NPAs. Literature suggests that usually secured loans are likely to result in low credit risks and, therefore, low NPAs ( Boot and Thakor, 1994 ). However, a positive relationship suggests that in the presence of mortgages, banks have compromised with the project assessment which has led to high NPAs. The results of the FE model for all banks suggest that earning management and loan quality are two key drivers of loan failure in India's banks.
A separate estimation has been done in order to identify the drivers of NPAs in PSBs as these bank groups constitute more than two-third of NPAs in the banking system. The estimated result shows that ROA is negatively associated with NPAs and SL is positively associated with NPAs. Interest income (II) is found to be negatively associated with NPAs. The results indicate that banks have undertaken risky lending and credit appraisal standards have been compromised while disbursing loans. A study by Gaur and Mohapatra (2020) found that compromise in the quality of lending has resulted in high NPAs India's PSBs. Another study by Dhar and Bakshi (2015) , while analysing NPAs in PSBs, suggested that II and ROA play a critical role in the accumulation of NPAs. In the case of private banks, ROA is found to be negatively associated with NPAs as banks have undertaken risky lending to maximise returns. Patra and Padhi (2016) in their study on drivers of NPAs in different categories of banks in terms of ownership found that ROA was negatively associated with NPAs in the case of Nationalised, SBI & Associates and Private banks. Operating cost which measures operational efficiency is found to be negatively associated with NPAs. NII is positively associated with NPAs. It suggests that in a scenario of high income in the form of non-interest income, banks tend to compromise on credit appraisal standards.
7. Conclusion
The paper has analysed the trends and determinants of the NPA crisis in India's banking sector, with a focus on understanding the drivers of the current phase of the crisis. We found that the PSBs have been badly affected. The NPA problem is not prevalent in private banks as a group, though their volume of loan defaults has increased. The results suggest that diversification of income, earning management or strategy and loan quality have significantly affected NPAs during the post-crisis period. Non-Interest Income (NII) which is a proxy for diversification of income is found to be positively associated with NPAs. It suggests that with an increase in non-interest income, banks have undertaken risky lending, thereby resulting in high NPAs. The relationship between ROA and NPAs was found to be negative suggesting, that declining interest income pushed the banks to undertake risky lending in order to maximise their earning. This has resulted in high NPAs. Secured loans as a percentage of total lending exhibited a positive relationship with NPAs, though literature suggests that usually secured loans are likely to result in low NPAs due to low credit risks. The above result suggests that in the presence of collaterals, the banks did not follow prescribed loan assessment standards which resulted in high credit risks, thus high NPAs. The result is almost similar in the case of PSBs. The findings suggest that banks should focus on improving scores on earning management and quality lending.
In the empirical analysis, three key bank-specific drivers of NPAs, namely, operational management (efficiency), earning management (efficiency) and lending quality have been taken into consideration while explaining high NPAs in India's banks. In addition to the above factors, the governance aspects of the banks can be another potential significant factor in explaining the drivers of the current phase of NPAs in banks in India.
Bank group-wise NPAs in India's banks: 2005–2020
All SCBs
Public sector banks
Private banks
Foreign banks
Year (end March)
Gross
Net NPAs
Gross
Net NPAs
Gross
Net NPAs
Gross
Net NPAs
NPAs
NPAs
NPAs
NPAs
NPAs as % of Advances
2005–06
3.3
1.2
3.7
1.3
2.4
1
2.1
0.8
2006–07
2.5
1
2.7
1.1
2.2
1
1.9
0.7
2007–08
2.2
1
2.2
1
2.5
1.1
1.9
0.8
2008–09
2.3
1.1
2
0.9
2.9
1.3
4.4
1.8
2009–10
2.5
1.1
2.3
1.1
3
1
4.4
1.8
2010–11
2.4
1
2.3
1.1
2.5
0.6
2.6
0.7
2011–12
2.9
1.3
3.2
1.5
2.1
0.5
2.8
0.6
2012–13
3.2
1.7
3.6
2
1.8
0.5
3
1
2013–14
3.8
2.1
4.4
2.6
1.8
0.7
3.9
1.1
2014–15
4.3
2.4
5
2.9
2.1
0.9
3.2
0.5
2015–16
7.5
4.4
9.3
5.7
2.8
1.4
4.2
0.8
2016–17
9.3
5.3
11.7
6.9
4.1
2.2
4
0.6
2017–18
11.2
6
14.6
8
4.7
2.4
3.8
0.4
2018–19
9.08
3.7
11.59
4.8
5.3
2
2.99
0.5
2019–20
8.21
2.8
10.25
3.7
5.45
1.5
2.34
0.5
Calculation based on RBI data
Name of the bank
Category
2005–09
2009–14
2015–20
Allahabad Bank
PSB
3.23
2.81
14.69
Andhra Bank
PSB
1.54
2.37
14
Bank of Baroda
PSB
3.35
1.96
10.34
Bank of India
PSB
3
2.79
14.7
Bank of Maharashtra
PSB
4.18
2.44
14.99
Canara Bank
PSB
2.1
1.9
9.55
Central Bank of India
PSB
5.4
3.78
17.89
Corporation Bank
PSB
2.13
1.58
13.64
Dena Bank
PSB
4.95
2.42
13.87
Indian Bank
PSB
2.21
1.93
7.1
Indian Overseas Bank
PSB
3.04
3.63
20.36
Oriental Bank of Commerce
PSB
4.41
2.6
13.25
Punjab and Sind Bank
PSB
6.16
1.88
10.83
Punjab National Bank
PSB
3.61
2.99
14.7
Syndicate Bank
PSB
3.35
2.4
10.03
UCO Bank
PSB
3.32
3.52
19.92
Union Bank of India
PSB
3.19
2.8
12.94
United Bank of India
PSB
3.99
4.45
16.55
Vijay Bank
PSB
2.39
2.4
5.23
State Bank of India
PSB
3.31
3.71
8.01
IDBI Ltd
PSB
1.91
2.57
16.41
HDFC Bank Ltd
Private
1.57
1.2
1.17
ICICI Bank Ltd
Private
3.1
4.62
7.58
IndusInd Bank Ltd
Private
2.82
1.16
1.8
Kotak Mahindra Bank Ltd
Private
2.22
2.51
2.31
Yes Bank Ltd
Private
0.16
0.32
4.72
Axis Bank
Private
1.44
1.24
4.71
*In 2018, Vijay Bank and Dena Bank were merged with the Bank of Baroda
Calculation based on RBI data
Variable
Obs
Mean
SD
Min
Max
NNPA
472
2.85
2.99
0.10
16.70
OC
472
0.25
0.08
0.10
0.60
II
472
2.75
0.81
0.10
6.30
NII
472
1.18
0.52
0.20
3.40
LSS
472
19.73
10.76
4.70
72.10
CAR
472
13.51
3.34
1.10
56.40
ROA
472
0.54
1.16
−5.50
3.00
SL
472
82.76
14.62
18.20
99.80
Author's calculation
NNPA
OC
II
NII
LSS
CAR
ROA
SL
NNPA
1
OC
−0.1412
1
II
−0.5189
0.4305
1
NII
−0.2302
0.5038
0.6002
1
LSS
−0.0757
0.3818
0.347
0.4912
1
CAR
−0.4228
0.3064
0.4522
0.2945
0.1993
1
ROA
−0.6433
0.0429
0.6421
0.4376
0.1552
0.4666
1
SL
0.3042
−0.4729
−0.4553
−0.4164
−0.4792
−0.2796
−0.3807
1
Author's calculation
Independent variable = NNPA
FE model
RE model
OC
−4.197
−5.946**
(3.098)
(2.533)
II
−0.5817
−0.511
(0.401)
(0.346)
NII
1.975*
1.416*
(0.391)
(0.387)
LSS
−0.0436
−0.008
(0.030)
(0.014)
CAR
0.027
−0.002
(0.044)
(0.045)
ROA
−1.335*
−1.567*
(0.187)
(0.200)
SL
0.0806*
0.009
(0.017)
(0.010)
Constant
−3.513**
3.182*
(1.410)
(1.154)
Observations
472
472
Hausman statistics
0.667 81.41 (0.00)
Standard errors in parentheses < 0.01, < 0.05, < 0.001 Author's calculation
Variable
Obs
Mean
SD
Min
Max
NNPA
219
4.25
3.28
0.20
16.50
OC
219
0.21
0.05
0.10
0.60
II
219
2.31
0.42
1.00
3.60
NII
219
0.91
0.25
0.40
1.70
LSS
219
16.46
4.18
7.50
27.00
CAR
219
11.98
1.54
2.00
15.40
ROA
219
0.05
1.07
−5.50
1.70
SL
219
85.86
6.25
64.90
97.10
Author's calculation
NNPA
OC
II
NII
LSS
CAR
ROA
SL
NNPA
1
OC
0.2872
1
II
−0.4832
−0.0523
1
NII
0.2558
0.3955
0.0139
1
LSS
0.3512
0.4367
−0.0908
0.3277
1
CAR
−0.4738
−0.3249
0.3244
0.0085
−0.1166
1
ROA
−0.6095
−0.5305
0.4088
−0.1541
−0.4542
0.6082
1
SL
0.4838
0.076
−0.1163
−0.0458
0.0634
−0.4372
−0.3646
1
Author's calculation
Independent variable = NNPA
FE model
RE model
OC
−5.253
−5.460
(3.948)
(4.020)
II
−1.148**
−1.199**
(0.515)
(0.494)
NII
1.433
1.749
(1.379)
(1.228)
LSS
0.043
0.032
(0.070)
(0.039)
CAR
−0.081
−0.717
(0.137)
(0.254)
ROA
−0.491**
−0.101
(0.227)
(0.138)
SL
0.080**
0.096*
(0.037)
(0.034)
Constant
−2.409
−3.179
(3.388)
(3.234)
Observations
219
219
Hausman statistics
0.85 30.44 (0.023)
Note(s): Standard errors in parentheses
* p < 0.01, ** p < 0.05, *** p < 0.001
Source(s): Author's calculation
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Acknowledgements
The paper is drawn from a research project “ Performance of India’s Banking Sector: A Critical Focus on Non-Performing Advances (NPAs) ,” funded by the Indian Council of Social Science Research under ICSSR-MHRD IMPRESS Scheme. The funding body has NO role in the designing of the study, analysis, interpretation of the data and in writing. The research paper/study has been designed and prepared by the author.
The data that support the findings of this study are collected from public domain resources. It is available at https://dbie.rbi.org.in/DBIE/dbie.rbi?site=publications [RBI publications/database on Indian economy].
Corresponding author
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Solving the NPA Crisis in India
11 May 2019
11 min read
GS Paper - 3
Banking Sector & NBFCs
Fiscal Policy
Capital Market
This editorial is based on the article “Resolving India’s banking crisis” which appeared in "The Hindu" on 11th May, 2019. The article talks about how the India’s banking problems can be solved without privatising the PSBs.
India's banking sector is an unresolved problem.
To resolve this problem we will need clarity on how the problem arose in the first place. Also, we will need to discard simplistic and ideologically-driven solutions in favour of those that can be practical and effective.
Indian banks and NPAs
Here is why the NPA problem is such a big problem to Indian banks, especially PSBs.
In March 2018, non-performing assets (NPAs) at commercial banks amounted to ₹10.3 trillion, or 11.2% of advances.
Public sector banks (PSBs) accounted for ₹8.9 trillion, or 86%, of the total NPAs.
These are levels typically associated with a banking crisis.
For example, in 2007-08, NPAs totalled only ₹566 billion (a little over half a trillion), or 2.26% of gross advances!
The current trend is that the increase in NPAs since 2008 has been staggering.
How did this problem come about?
The answer lies partly in the credit boom of the years 2004-05 to 2008-09.
In that period, commercial credit (or what is called ‘non-food credit’) doubled. It was a period in which the world economy as well as the Indian economy were booming. Indian firms borrowed furiously in order to avail of the growth opportunities they saw coming.
Most of the investment went into infrastructure and related areas — telecom, power, roads, aviation, steel.
Businessmen were overcome with exuberance and they believed, as many others did, that India had entered an era of 9% growth.
But soon after, as the Economic Survey of 2016-17 notes, many things began to go wrong.
There were problems in acquiring land and getting environmental clearances and several projects got stalled. Project costs soared.
At the same time, with the onset of the global financial crisis in 2007-08 and the slowdown in growth after 2011-12, revenues fell well short of forecasts.
As a result, financing costs rose as policy rates were tightened in India in response to the crisis.
Further, the depreciation of the rupee meant higher outflows for companies that had borrowed in foreign currency.
This combination of adverse factors made it difficult for companies to service (i.e maintain and repay) their loans to Indian banks.
The year 2014-15 marked a watershed because of tightening of banking norms.
Read more: On the Need for a National Development Bank
Higher NPAs mean higher provisions on the part of banks. [A provision is an amount that you put in aside in your accounts to cover a future liability. The purpose of a provision is to make a current year's balance more accurate, as there may be costs which could, to some extent, be accounted for in either the current or previous financial year]
Their capital got eroded as a result.
Once NPAs happen, it is important to effect to resolve them quickly. Otherwise, the interest on dues causes NPAs to rise relentlessly .
Where is the solution to this problem?
Is the problem public ownership of banks?
Since the problem is more concentrated in PSBs, some have argued that public ownership must be the problem.
Public ownership of banks, according to them, is beset with corruption and incompetence (reflected in poor appraisal of credit risk). The solution, therefore, is to privatise the PSBs, at least the weaker ones .
There are problems with this idea of privatising PSBs.
In 2018, the State Bank of India’s (SBI’s) gross NPA/gross advances ratio was 10.9%. This was not much higher than that of the second largest private bank, ICICI Bank, 9.9%.
Moreover, private and foreign banks were part of consortia that are now exposed to some of the largest NPAs. Therefore the explanation lies elsewhere .
A brief look at the state of PSBs show that they are not in as bad a shape as many make them out to be.
These sectors accounted for 29% of advances and 53% of stressed advances at PSBs in December 2014. For private sector banks, the comparable figures were 13.9% and 34.1%.
Rough calculations show that PSBs accounted for 86% of advances in these five sectors . (By an interesting coincidence, this number is exactly the same as the PSBs’ share in total NPAs)
As mentioned earlier, infrastructure projects were impacted by the global financial crisis and environmental and land acquisition issues. In addition, mining and telecom were impacted by adverse court judgments. Steel was impacted by dumping from China. Thus, the sectors to which PSBs were heavily exposed were impacted by factors beyond the control of bank management.
Wholesale privatisation of PSBs is thus not the answer to such a complex problem.
We need a broad set of actions, some immediate and others over the medium-term and aimed at preventing the recurrence of such crises.
Way Forward
One immediate action that is required is resolving the NPAs.
Banks have to accept losses on loans (or ‘haircuts’).
They should be able to do so without any fear of harassment by the investigative agencies.
The Indian Banks’ Association has set up a six-member panel to oversee resolution plans of lead lenders. To expedite resolution, more such panels may be required .
An alternative is to set up a Loan Resolution Authority , if necessary through an Act of Parliament.
Also, the government must infuse at one go whatever additional capital is needed to recapitalise banks — providing such capital in multiple instalments is not helpful.
Management of Concentration Risk
One important lesson from the past decade’s experience with NPAs is that management of concentration risk — that is, excessive exposure to any business group, sector, geography, etc. — is too important to be left entirely to bank boards.
The RBI has drawn this lesson to some extent.
Effective April 1, 2019, the limit for exposure to any business group has been reduced from 40% of total capital to 25% of tier I capital ( which consists of equity and quasi-equity instruments ).
The limit for a single borrower will be 20% of tier 1 capital ( instead of 20% of total capital ).
To conclude, the task of accelerating economic growth is urgent. This is not possible without finding a solution to the problems that confront the banking system.
There is ample scope for improving performance within the framework of public ownership.
What is needed is a concentrated focus on the part of the government.
Discuss the crisis of non-performing assets (NPAs) in the context of Public Sector Banks (PSBs) in India. What are some of the ways in which we can overcome this crisis?
How to solve issue of rising non-performing assets in Indian public sector banks
Richa roy , rr richa roy finance and public policy lawyer, graduate research fellow - global economic governance, university of oxford krishnamurthy subramanian , and krishnamurthy subramanian senior visiting fellow shamika ravi shamika ravi former brookings expert, economic advisory council member to the prime minister and secretary - government of india.
March 1, 2018
10 min read
Content from the Brookings Institution India Center is now archived . After seven years of an impactful partnership, as of September 11, 2020, Brookings India is now the Centre for Social and Economic Progress , an independent public policy institution based in India.
The Indian banking system is beleaguered with non-performing assets (NPAs). According to the Reserve Bank of India’s Financial Stability Report of December 2017 , they currently stand at 10.2 per cent of all assets, while stressed assets, which are believed to be NPAs in effect, stand at 12.8 per cent. Related frauds amount to INR 612.6 billion in the last five financial years and governance failures on account of integrity and competence issues plague the banking system.
Brookings India recently organised a roundtable in Mumbai on NPA resolution; participants ranged from a former Deputy Governor of the RBI, to bankers from public and private sectors, asset reconstruction companies to rating agencies, IMF representatives to financial journalists and academics. In a wide-spanning discussion, a few key themes emerged: the privatisation and governance of public sector banks, the governance and regulatory practices of the RBI and reengineering of banking practices.
i) Public Sector Banks:
Public Sector Banks (PSBs) constitute over 70 per cent of the banking system and are in a state of crisis. Participants believed that fundamental reforms tended to happen when crisis hit and this was an opportune moment for such reforms and expressed optimism that this was likely under this government .
Bank Holding Company structure : The bank holding company (BHC) structure recommended by the P.J. Nayak Committee, among others, involves divesting the government’s shareholding to below 52 per cent and routing it through a holding company. This one level of distance would not help unless the BHC was itself professionally managed.
Sovereign Wealth Fund: Rather than the proceeds of privatisation going to the Consolidated Fund of India, a sovereign wealth fund could be created which is professionally managed. This could help “trickle down” good governance practices to PSBs.
Hive off social sector lending vehicle : The political economy of privatisation remains complex, at least in part because of social sector lending programmes routed through PSBs. Accordingly, it may be useful to consider hiving off all agricultural and social sector lending into a separate entity which may be government owned and controlled and allow the corporate lending part of the PSBs to be privatised. There is an economic rationale for this as well. PSBs (and indeed all banks) are required to lend 40 per cent of their assets to “priority sectors.” Priority Sector Lending (PSL) is deemed unprofitable for several banks leading to a “PSL drag.” On the other hand, microfinance non-banking finance companies (NBFC MFIs) have a cap on their earnings margins. Accordingly, the decoupling of PSL and market lending may allow market distortions in both these sectors to be corrected.
Recapitalise, Reform and then privatise : PSBs in their current state of impaired balance sheets are unlikely to find any takers. By the same token, recapitalising PSBs repeatedly creates moral hazard issues. Recapitalisation and governance reform can enhance market valuations of PSBs and should lead to a path for privatisation without accusations of “selling off the family silver.”
Single Big Bank? The idea of a single large PSB mimicking the Life Insurance Corporation of India model in the insurance space may be considered, but such an entity could create serious distortions, such as moral hazard stemming from the too-big-to-fail syndrome, with the next biggest bank being on-fourth its size.
“Bad Bank” : The idea of a single bad bank where the NPAs of all PSBs may be transferred as a silver bullet to clean up PSB balance sheets must be rejected. Currently, 11 of 21 listed PSB banks are under RBI’s prompt corrective action framework and simply consolidating all NPAs would create an additional level of complexity.
The umbilical cord connecting public sector banks to politicians and bureaucrats, which in turn stems from the ownership structure of these banks, has led to several inefficiencies.
Nayak Committee : Should privatisation not be on the table, the government should back the recommendations of the Nayak Committee. Presently, only lip service is being done to them by way of example, the Bank Boards Bureau (BBB) uses the nomenclature of the Nayak Committee but none of its substantive governance reforms have been implemented. For example, all the governance functions including selection of bank chairpersons continues to be controlled by the Ministry of Finance.
Role, purpose and business strategy : PSBs suffer from a severe identity crisis and require business, not just financial, restructuring. They do not operate as commercial banks and do not have a coherent business strategy or vision. The Ministry of Finance must ascertain whether this is the best use of public money. It is crucial to clarify the role and purpose of PSBs and for them to concentrate on specific regions or business segments. By way of example, it is unclear why certain PSBs have branches in South Africa, why a Punjab-based PSB has branches in the North-East. The need for existence of each PSB must be clear and its business and expansion should follow that. This would also force an evaluation of whether PSL lending has been effective.
Term lengths : The terms of bank chairpersons must be elongated in order to effect meaningful changes and to hold them accountable. Presently, it is observed that as the Chairpersons of State Bank of India (SBI) change, there is an NPA “bloat”- the outgoing chairperson tends to backload NPAs, which obscures the situation of PSB bank balance sheets. (For instance, SBI posted a loss of INR 24 billion in the last quarter on account NPA provisioning). Terms of chairpersons should align with the life of the loan, which would allow defaults to be detected and penalties to be meted out as required.
Professionalise, Incentivise – Incentives for PSB personnel must be significantly augmented. The SBI chairman’s salary is equal to that of a fresh business graduate in an MNC bank. Better incentive structures will attract better talent.
Penalise for wrongdoing : Although vigilance mechanisms exist, lax enforcement means that wrongdoing is rarely penalized. For instance, the Chairman of Syndicate Bank who was bribed by the promoters of Bhushan Steel was in jail for barely a few months and has not been convicted as yet. Rotation of staff : The Punjab National Bank fraud demonstrates the extent of operational and risk management failures in PSBs. Improvements to HR practices can help mitigate egregious behavior like frauds. For instance, PSBs tend to man the business verticals with the brightest talent and less competent staff in the inspection and supervision roles. If officers are rotated in these roles, this could not only strengthen the supervision of banks, it would also mean that staff on the business development side have experience in supervision and inspection and will therefore self-regulate better. Credit appraisal, monitoring : Basic principles of credit appraisal and monitoring are obviated in PSBs and must be sharpened, to diagnose defects of capital, business purpose and character.
Public sector banks suffer from a severe identity crisis and require business, not just financial, restructuring.
ii) RBI governance and regulation
The RBI as a regulator has had qualified success in the face of structural impediments, including limited control over PSBs. RBI’s internal governance as well as its regulation of NPAs needs improvement.
Subsidiarisation: The RBI may consider the Bank of England model of subsidiarising its prudential regulatory and supervision functions (the Prudential Regulatory Authourity and the Financial Conduct Authority). However, the recognition that lost synergies from such separation contributed to the global financial crisis demands caution.
Strengthening supervisory capacity : RBI lacks supervisory capacity to conduct forensic audits and this must be strengthened with human as well as technological resources.
Preventing Evergreening: RBI regulations have permitted banks to “ever-green” and in effect delay the recognition and therefore resolution of NPAs. RBI regulations must take away incentives of banks to kick the can down the road and “extend and pretend”. This has led to a seizure of new lending and the caving in of credit culture. The recent RBI circular does remove such incentives by ending all other schemes such as CDR that allowed evergreening, which would lead to fewer delays in provisioning. This in turn, would require the recapitalisation of PSBs, which must not be carried out without the reforms set out above.
iii) Reengineering of banking systems
Secondary Market: A vibrant secondary market for NPAs is crucial. The lack of transparency in price of the assets is holding this back, as is the lack of autonomy in PSBs and the fear of vigilance action.
Concurrent Audit: There is a real rot in the internal and concurrent audit systems of banks. The latter is intended to red flag risks in real time, but has failed and must be shored up.
Diagnostics for willful default: Banks need better permanent diagnostics to get to the bottom of willful defaults. This can happen though (a) market intelligence; (b) funds flow analysis; and (c) financial analysis. Most promoters do not have sufficient “skin in the game” and rely entirely on bank borrowing.
Using technology for maker-checker: Currently, the maker-checker systems require human intervention and are therefore prone to capture and corruption. The use of Artificial Intelligence for the supervision of financial transactions could prevent financial fraud. In addition, linking Core Banking Systems (CBS) with Finacle technology (as recently required by RBI) is crucial.
Combine with low tech – ears on the ground: Business intelligence must use traditional means- speaking to people in the industry; supplier and customers can be an invaluable source of financial information.
iv) Bright Spots
Amidst the gloom, the functioning of the Insolvency and Bankruptcy Code (Code) is cause for optimism. The Code was passed an implemented in 13 months, which is faster even when compared to Singapore’s amendments to its insolvency law. The Code is also being implemented in full speed- 50 per cent of all NPAs are currently being resolved through the Code, another 25 per cent will soon be. The judiciary has been following the (very tight) timelines prescribed by the Code.
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Non-performing Assets of Indian Banking: An Evolutionary Journey
First Online: 23 November 2023
Cite this chapter
Rakesh Mohan 3 &
Partha Ray 4
Part of the book series: India Studies in Business and Economics ((ISBE))
169 Accesses
This paper narrates the story of the evolutionary journey of non-performing assets (NPA) in the Indian banking sector. Three distinct phases of the intertemporal behavioral of NPAs of the Indian banking sector can be discerned. First, since the initiation of financial sector reforms till about the beginning of the North Atlantic Financial Crisis (NAFC), NPAs showed a consistent downward trajectory. Second, during 2008–09 through 2017–18 the NPAs showed a distinct spurt. Third, since then, NPAs marked by a downward trend till 2019–20 until the economic disruptions caused by Covid 19. Contrary to the popular perception of treating the second phase of rising NPAs as one emanating exclusively from governance issues in public sector banks (PSBs), four factors have been identified: (a) falling commodity prices; (b) regulatory forbearance; (c) initial exuberance in infrastructure projects punctured by a downward phase of business cycles (leading to substantial debt accumulation of select big corporates); and (b) governance failure in select PSBs. Moving forward, while the pandemic and some of the associated policy measures could reverse the recent downward trends in NPA, more durable policy initiatives like bankruptcy reforms are expected to make significant positive changes in the NPA situation of Indian banks.
Disclosure: Rakesh Mohan was a Deputy Governor of Reserve Bank of India from 2002 to 2004 and from 2005 to 2009. Partha Ray was a staff member at RBI from 1989 to 2013. The paper reflects personal views of the authors. The authors are indebted to Shankar Acharya, Sajjid Chinoy, Jaimini Bhagwati and Anoop Singh for their comments on an earlier working paper version of the essay (CSEP Working Paper No. 22). An earlier version of the paper was presented in a Conference on “India’s Contemporary Macroeconomic Themes” at Madras School of Economics, April 21–22, 2023. The authors are also indebted to the participants of the Conference and in particular to C. Rangarajan, S. Mahendra Dev, M. Govinda Rao, and N. R. Bhanumurthy for their comments. The usual disclaimer applies.
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COVID-19: boon/disguise for Indian banks?
Non-performing assets (NPAs) and its determinants: a study of Indian public sector banks
The Efficiency of Indian Banks: A DEA, Malmquist and SFA Analysis with Bad Output
Following Mohan ( 2011 ), we use the term North Atlantic Financial Crisis (NAFC), in contrast to the more widespread usage of the global financial crisis (GFC). It has been conscious and has been prompted by (a) the origin of the crisis, and (b) its lack spread across the globe beyond the North Atlantic.
For the bulk of our analysis, we consciously avoid 2020–21 because of the Covid19-related complications.
This discussion follows RBI Circular on “Prudential Norms on Income Recognition, Asset Classification and Provisioning—Pertaining to Advances” of August 30, 2001 (DBOD No. BP.BC/20/21.04.048/2001-2002) (RBI, 2001 ); available at https://m.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?Id=449&Mode=0 (accessed in May 2021).
Treatment of an agriculture loan is, however, slightly different and in the case of an advance granted for agricultural purpose, it is classified as an NPA if “interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years”.
RBI Master Circular on Wilful Defaulters of July 2, 2007; available at https://www.rbi.org.in/Scripts/BS_ViewMasterCirculars.aspx?Id=3670&Mode=0 .
This period was marked by presence of “lazy bankers”; see Mohan ( 2002 ) for details. It is pertinent to turn to RBI’s Report on Currency and Finance, 2007 , which noted, “Bank credit, after witnessing an erratic pattern in the first half of the 1990s, showed a deceleration from 1996–97 to 2001–02….. Several factors, both on the demand and the supply sides, contributed to the contraction of credit. On the supply side, introduction of prudential norms relating to income recognition, asset classification and provisioning in the mid-1990s made banks cautious. Application of norms revealed large gross NPAs with banks…. Banks, therefore, became wary of enlarging their loan portfolio. The relatively high level of NPAs, in particular, had a severe impact on weak banks. Banks’ capacity to extend credit was also impaired due to little headroom available in the capital adequacy ratio ….. Banks found risk-adjusted returns on government securities more attractive. Hence, despite lowering of statutory pre-emption in the form of SLR, banks continued to invest in government securities, far in excess of the requirements. …. On the demand side…the corporate sector faced intense competition during the latter part of the 1990s. The focus of the corporate sector, thus, shifted from expanding capacity to restructuring and the industrial sector slowed down significantly. …Increased competition also forced corporates to restructure their balance sheets, whereby they increased their reliance on retained earnings and reduced their borrowings.”
The performance of recovery under the SARFAESI Act was not impressive. One of the major drawbacks of the Act is that it is not applicable to unsecured creditors. There were implementation-related issues. Some of the loopholes were, in principle, plugged in the Insolvency and Bankruptcy Code, 2016.
Banks were initially required to mark to market 30% of their investment portfolio in 1992–93—the proportion was gradually raised to 75% in 1999–2000.
Insofar as low growth during the initial years of this period is concerned, Mohan ( 2019 ) notes, “There was… some loss of the growth momentum in the latter half of the 1990s in the wake of the East Asian financial crisis, setbacks to the fiscal correction process, deterioration in the quality of fiscal adjustment, slowdown in agriculture growth affected by lower than normal monsoon years, some slackening in the pace of structural reforms, monetary tightening to contain inflation, and excessive enthusiasm and optimism with regard to investment plans in domestic industry following deregulation, some of which went awry” (p. 12).
RBI’s Report on Currency and Finance, 2007–08 noted, “Major factors that contributed to the acceleration in credit growth were pick-up in economic growth, improvement in asset quality of the credit institutions, moderation in inflation and inflation expectations, decline in real interest rates, rising income of households and increased competition with the entry of new private sector banks (as detailed in the subsequent sections). The removal of restrictions on retail credit and project finance by banks also created new sources of credit demand”.
See Mohan and Ray ( 2019 ) for details of India’s stimulus package following NAFC.
The word regulatory forbearance has been used repeatedly in this paper. A priori it could be interpreted in two senses, viz., (a) the regulator knows what was going on when there were periodic bouts of excessive lending particularly by public sector banks to dubious credits but held back on pointing out the dangers involved; and (b) the regulator is taking overall stability of the banking sector and ramifications for the financial sector as a whole, but chooses not to rattle markets by blowing the referee's sharp whistle in a situation where growth and perceived lack of credit could be a concern. We have primarily used the word regulatory forbearance in the sense of (b). Of course, regulatory forbearance of various shape and form tended to take place in various periods in Indian banking.
This is except in the case of direct advances to the agricultural and SME sectors which shall continue to attract provisioning of 0.25%, as earlier.
The RBI Report on Trends and Progress of Banking in India , 2015–16 noted, “AQR brought to the fore significant discrepancies in the reported levels of impairment and actual position and hence, led to increase in provisioning requirements for banks”.
The AQR used off-site data extensively and compared the quality of these loan assets against applicable Reserve Bank norms. The banks were advised about the position that emerged from the review, along with a recommendation to adjust impairments in their books appropriately.
RBI Circular on “Resolution of Stressed Assets—Revised Framework”, No. DBR.No.BP.BC.101/21.04.048/2017-18, available at https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11218&Mode=0 . In the revised framework, a strict deadline of 180 days was put in place; during this period. A resolution plan must be implemented, failing which stressed assets must be referred to the National Company Law Tribunal (NCLT) under IBC within 15 days.
The original PCA framework was introduced in December 2002 as “a structured early intervention mechanism along the lines of the FDIC’s PCA framework”. Subsequently, the RBI reviewed the framework in line with the recommendations of the Working Group of the Financial Stability and Development Council (FSDC) on Resolution Regimes for Financial Institutions in India (January 2014) and the Financial Sector Legislative Reforms Commission in March 2013 (Acharya, 2018 ).
The role of the commodity price fall in the generation of NPAs has been documented and analyzed in Kumar et al. ( 2022 ).
Of course, the macro and sectoral impact of a general fall in commodity prices could differ. As India is a net importer of several crucial commodities including oil, a general fall in commodity prices could be beneficial to the economy, but for the importing firms, it could have deleterious effects and may lead to NPA formation. Besides, if steel prices fall that may be bad for companies like Bhushan Steel but should be good for the construction industry and home sales. Hence, the initial fall in supply could be counterbalanced to some lesser extent.
This observation needs reconsideration in light of the recent severe banking stress exhibited in the United States. Even some relatively large banks have shown inadequate interest rate risk management in the presence of rapidly tightening of monetary policy by the US Federal Reserve in 2022–23. Hence there may be a legitimate role for banking regulators to stave off such potential financial instability through relevant regulation, analogous to macroprudential regulation.
Note that data sources for Tables 12.8 and 12.9 , on the one hand and Table 12.11 , on the other are distinct and, hence, strictly speaking, data are not comparable between these tables. While Tables 12.8 and 12.9 are derived from data collected under the especially collected Basic Statistical Returns, Table 12.11 is from the statutory returns of sectoral deployment of gross bank credit.
Later in 2012, in another auction of 2G spectrum (in both GSM and CDMA bands), the government received bids worth a total of Rs. 9,4 billion, far lower than its target of Rs. 280 billion from the sale of 2G spectrum in the GSM band. Subsequently, in March 2013 too response to the spectrum auction was poor.
These loans were restructured in 2012, with a three-year moratorium for the principal amount of Rs. 430 billion.
The names of the following corporate groups, viz., Adani Group, Essar Group, GMR Group, GVK Group, Jaypee Group, JSW Group, Lanco Group, Reliance ADAG, Vedanta Group, and Videocon Group have been reported in the House of Debt report of October 2015 (see, https://plus.credit-suisse.com/rpc4/ravDocView?docid=V4pSWN1AF-WElY95 ). In March 2007, “these groups owed the Indian banking system a total of Rs. 99,300 crore, or around 5.7% of the total loans given out by the Indian banking system. In March 2012, the loans had jumped to around Rs. 5,39,500 crore” (Kaul, 2020 ). Later it reached Rs. 7,335,45 crore in 2014–15. Chart 12.6 reports updated numbers from the Economic Survey, 2016–17.
Ashish Gupta, the then Head of Equity Research of the Credit Suisse, the principal author of the House of Debt Report, said in an interview, “In 2011 was when we first came out and said NPAs in the banking system are in double digits and not the 2% that is reported. But 2012 is when we narrowed it down. I remember in 2013–14 we did another report where we showed NPA numbers had gone up. We looked at annual reports of the companies, which according to Indian regulations had to start reporting if they were in default of payments to creditors. So we aggregated some top 200 annual reports and some of the companies we were tracking. Just by adding that, we were able to come to some double-digit number on the percentage of corporates where in the annual Report the company has mentioned it is in default of its debt obligations, and it was not reported by the banks. So in the banks’ book it was not an NPA. And in fact many of the companies in their reports even mentioned the amount in default, the period of default—and in many cases that was more than 90 days [the threshold for bad-loan recognition in India]. But still in the bank books everything was good. So I don’t know where the slip was” (“Ashish Gupta: The man who saw India’s NPA crisis early warns of new peril”, The Mint , March 20, 2020).
In response to the Lok Sabha Question No. 1551, the Minister of State in the Ministry of External Affairs [Gen. (Dr.) V. K. Singh (Retd)], listed 41 names on December 19 2018. Specifically, he replied, “According to the information provided by the ED, the list of people involved in financial irregularities and facing criminal investigation and who fled the country or are living abroad are as follows: (i) Shri Vijay Mallya; (ii) Shri Christian Michel James; (iii) Shri Nirav Modi; (iv) Shri Mehul Choksi; (v) Shri Ashish Sureshbhai Jobanputra; (vi) Mrs. Priti Ashish Jobanputra; (vii) Shri Ramachandran Viswanathan; (viii) Shri M.G. Chandrasekhar; (ix) Shri Sanjay Bhandari; (x) Shri Nitin Jayantilal Sandesara; (xi) Shri Chetan Jayantilal Sandesara; (xii) Smt. Dipti Chetan Sandesara; (xiii) Shri Hiteshkumar Narendrabhai Patel; (xiv) Shri Deepak Talwar; (xv) Smt Deepa Talwar; (xvi) Shri Sunny Kalra; (vii) Smt Aarti Kalra; (viii) Shri Sanjay Kalra; (xix) Smt Varsha Kalra; (xx) Shri Jatin Mehta; (xxi) Shri Lalit Modi; (xxii) Shri S. Harpal Singh Dutta; (xxiii) Shri Ritesh Jain (xxiv); Shri Mugundhan Ganyam; (xxv) Shri Pushpesh Kumar Baid; (xxvi) Shri Nitish J. Thakur; (xxvii) Smt. Purvi Modi; (xxviii) Shri Mihir Rashmi Bhansali; (xxix) Shri Aditya Nanawati; (xxx) Shri Sunil Verma; (xxxi) Shri Neeshal Deepak Modi; (xxxii) Shri Nehal Modi; (xxxiii) Shri Maiank Mehta; (xxxiv) Shri Jayesh Indervadan Shah; (xxxv) Shri Deepak Krishnrao Kulkarni; (xxxvi) Shri Deepak Modi; (xxxvii) Shri Subhash Shankar Parab; (xxxviii) Shri Rajiv Saxena; (xxxix) Shri Rajesh Gajera; (xl) Shri Carlo Valentino Fernando Gerosa; (xli) Shri Guido Ralph Haschke”; available at https://www.mea.gov.in/lok-sabha.htm?dtl/30788/QUESTION_NO1551_FINANCIAL_ABSCONDERS_ABROAD .
In the context of the political economy of financial sector corruption, Majumdar ( 2016 ) commented, “Firms borrowed more because banks willingly lent them more, irrespective of project or business viability”.
Two recent books do exciting analyses of the relevant issues for India; see Kaul ( 2020 ) and Bandopadhyay ( 2020 ) for select cases of corruption and interferences in Indian banking.
Shri Viond Rai, the first Chairman of BBB reportedly mentioned in a letter to the Finance Ministry, “The bureau, as a body of experts on public sector banking, would be able to provide greater utility to the FM on matters relating to the governance and performance of PSBs, if there were to be greater organic linkage and dialogue with the finance ministry. At present, the body is merely functioning as an appointment board” (Business Standard, October 20, 2018, available at https://www.business-standard.com/article/finance/rai-alleges-communication-breakdown-between-banks-board-bureau-and-govt-118031901218_1.html ).
RBI Circular on “Resolution of Stressed Assets—Revised Framework”, number RBI/2017-18/131 DBR.No.BP. BC.101/21.04.048/2017-18, available at https://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=11218 .
Earlier schemes included CDR, JLF, SDR, S4A, flexible restructuring and others.
More recently, on April 3, 2019, however, the Supreme Court has effectively struck down the February 12, 2018 circular; the Bench assailed the circular as ultra vires to the provisions of the Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934 in the Dharani Sugars and Chemicals Ltd. v. Union of India case.
At present, the following PSBs are there: (1) Punjab National Bank (with Oriental Bank of Commerce and United Bank of India merged with it); (2) Canara Bank (with Syndicate Bank merged with it); (3) Indian Bank (with Allahabad Bank merged with it); (4) Union Bank of India (with Andhra Bank and Corporation Bank merged with it); (5) State Bank of India (with five of its Associate Banks and Bharatiya Mahila Bank merged with it from 2017); (6) Bank of Baroda; (7) Bank of India; (8) Central Bank of India, (9) Indian Overseas Bank; (10) Punjab and Sind Bank; (11) UCO Bank; and (12) Bank of Maharashtra.
In commenting on the paper, Dr. C. Rangarajan put forward the idea of relating credit growth to the growth of nominal GDP. After all, credit growth disproportionate to nominal income growth could generate NPAs. We have shown conclusively that much of the large corporate NPAs that arose in the 2010s were in fact the result of large lending in the post 2009 period.
Recognizing that the second wave of the pandemic could pose difficulties in loan servicing, the RBI announced Resolution Framework 2.0 allowing “restructuring of loans taken by individuals, small businesses and MSMEs with an exposure cap of ₹25 crore”. There were other measures as well, viz., fresh lending to MSMEs was allowed equivalent exemption from the Cash Reserve Ratio (CRR); and banks were also allowed to utilize 100% of countercyclical provisioning buffer for making specific provisions for NPAs.
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Essay on NPA Crisis in India | NPA Crisis in India Essay | Non-performing Assets (NPA) Crisis Essay
NPA Crisis has been major concern for banking sector as well as economy since long time. This is very important essay topic for all competitive exams specially for banking exams like ibps po, sbi po exams. Here we have written essay on NPA crisis in India which is very helpful for your exam.
Essay on NPA Crisis in India
Non-Performing Assets (NPA) is the biggest overhang on credit growth and banking sector health in India and is great concern for the banking system and economy. There are various reasons for growing banking NPAs including bad credit decisions, poor monitoring, laxity in vigilance, routine business downturns etc. Huge NPA has prompted the government to initiate some measures to tackle the NPA crisis in India .
Non-performing Assets (NPA)
In simple words, Loans or advances for which the principal or interest payment remained overdue for a specified period generally 90 days and above are classified as Non-Performing Assets (NPA) . Further, NPAs are classified into three categories i.e. 1. Substandard Assets, 2. Doubtful Assets, 3. Loss Assets depending upon the overdue period.
Non-performing Assets (NPA) in India
Gross non-performing assets (NPA) of banks increased to 11.50% of total loans in 2017 which was 2.3% in 2008. However, as per Economic Survey 2019, the gross non-performing asset (NPA) ratio of public sector banks (PSBs) decreased to 10.1% in December 2018 which was 11.5% in March 2018. Though after initiating various measures to tackle the NPA crisis in India , still a huge proportion of a bank’s loan are not generating income for the bank which result in lower bank’s profitability and its decrease its ability to grant further credit.
Also Read: 20 Most Expected Essay Topics for IBPS PO Mains
Causes of NPA crisis in India
There are various reasons for growing banking NPA in India. Economic crisis in the year 2008 made various loan under NPAs as it decreased repayment capability of various corporations which resulted in financial stress for banking sector as well as corporate sector. Another major reason for NPA is corporate frauds which contributed to rising NPAs. In addition to this, there are various reason for growing NPAs including bad credit decisions, poor monitoring, laxity in vigilance, routine business downturns etc. Download PDF of this Essay: Click Here
Measures taken to control Non-performing Assets (NPA)
To control the growing NPAs both regulatory measures like the Insolvency and Bankruptcy Code and remedial measures have been taken. Insolvency and Bankruptcy Code was introduced in 2016 to resolve claims involving insolvent companies which consolidated all laws related to insolvency and bankruptcy and to tackle Non-Performing Assets (NPA) . Other necessary measures like Amendments to IBC, Fugitive Economic Offender Act 2018, 4R Strategy, Project Sashakt, Amendments in Banking Regulation Act, 1949 etc. have been initiated to curb down growing NPA.
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Despite several initiatives by the Government, Reserve Bank of India and Financial Institutions, the problem of non-performing assets (NPAs) is still unfinished. A well-researched practical laws and strict compliance of the same is required to solve the problem of NPA and inclusive growth of India.
Hope you liked this essay on NPA Crisis in India and it helped you in your exam preparation.
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Npas and its effects on banks’ profitability.
Abhishek Sikdar
Abhishek Sikdar graduated in Economics from St Xavier's College under Calcutta University and post-graduation from Delhi School of Economics. He has worked in several leading business newspapers. During his service career, he had written numerous reports, conducted meetings with global economic consultants and international fund managers and imparted training programs to Sales Teams. LESS ... MORE
Introduction
The Indian economic crisis of 1990s fuelled the need of World Bank and IMF loans which led to the remodeling of the banking system in India along with the economic liberalization policies of 1991 in the ways of the Narsimham Committee reforms.
Among other things the Narsimham Committee recommended to reduce Non Performing Assets or NPAs.
What is a NPA of a bank?
NPA is nothing but old wine in new bottle. The bad loans which were known as Bad Debts has been renamed as Non Performing Assets as per the Narsimham Committee recommendations. Previously banks used to write off the bad debts as per their own decisions depending upon the health of the banks. But Narsimham Committee prescribed a standardized norm for provisioning of NPAs. Narsimham Committee was implemented in all banks in the year 1991. The committee also classified the assets in different categories and rates of %age for provisioning.
Classification of assets
Standard assets– no provision in 1991
Substandard assets — requires a provision of 15% on secured portion and 25% on the unsecured exposure. Doubtful assets — category 1–25% on secured portion and 100% on the unsecured portion
Category 2– 40% on the Secured portion and 100% on the unsecured portion
Category 3– 100%
Loss assets– 100%
Standard assets are those assets which are running good without any default. Previously there was no clause for provisioning of these standard assets. Subsequently banks were directed to provide on their standard assets also at the following rates:
Direct advance to agriculture or small and micro enterprise : 0.25%, Commercial real estate residential 0.75%, for real estate commercial 1% and teaser housing loan 2%.
Effects of NPAs
If it is analysed critically it would be evident that the banks started incurring losses after implementation of Narsimham Committee recommendations. Due to provisioning of assets in standardized form, the erosion of capital of the banks started. Thereafter the concept of strong banks and weak banks came into effect. For survival of weak banks the government started recapitalizing the weak banks.
RBI and government started pressuring the banks to implement stringent methods for recovery of the NPAs and to improve their balance sheets.
On critical analysis it has been observed that major portion of NPAs is contributed by several top industrialists. Generally the NPAs in agriculture and priority sector is comparatively lower than that of the corporate houses. It is said that due to government policies of waiving agriculture loans in cases of floods, droughts and natural calamities burden of NPAs of all PSBs is increasing. Generally marginal farmers and small entrepreneurs pay their loans in due time which is evident from surveys by different agencies.
Though the government has enacted SARFAESI Act in 2002 that empowered the banks to acquire the mortgaged land, building, etc and dispose the same in auction for recovery of bad loans but the banks are still facing problems while implementing the said Act.
Reasons for the rise in NPAs
Some are macroeconomic factors such as lower exports due to global recession, downturn in commodity price cycles, etc.
Most of today’s NPAs are from loans in the mid-2000s, when the economy was booming and business confidence was buoyant. But as economic growth stagnated post the global financial crisis of 2008, the repayment capacity of these borrowers declined. This lead to what is called the India’s Twin Balance Sheet problem, where both the banking sector and the corporates are reeling under financial stress.
Also political factors like crony capitalism too has caused high NPAs in India.
Further, recently there have also been frauds of high magnitude that have contributed to rising NPAs. Although the size of frauds as compared to the total volume of NPAs is relatively small, these frauds have been increasing, and there have been no instances of high profile fraudsters such as Vijay Mallya, Nirav Modi and Mehul Choksey being penalised.
Corrective Action Plan to Arrest increasing NPAs
Banks must identify early that there is going to be a non-payment and report it to the Central Repository of Information on Large Credits (CRILC).
Preventive Measures
Evaluate borrower’s Credit Information Bureau (India) Limited (CIBIL) score.
Compromise or use various settlement schemes.
Use alternative dispute resolution mechanisms for faster settlement of dues such as use Lok Adalats and Debt Recovery Tribunals.
Actively circulate information of defaulters.
Take strict action against large NPAs.
Use Asset Reconstruction Company.
Legal Reforms such as implementation of the Insolvency and Bankruptcy Code have already taken place.
Corporate Debt Restructuring (CDR).
Propose guidelines on wilful defaults/diversion of funds.
Special Mention Accounts – Additional Precaution at the Operating Level.
Latest Measures by RBI
The main proposals are:
Lenders’ Committee with strict timelines for a resolution plan to be established.
Lenders must be given incentives to agree to collectively and quickly plan
Improvement in current restructuring process focus on viable plans and a fair sharing of losses between promoters and creditors.
Future borrowing for non-cooperative borrowers with lenders must be made more expensive in resolution.
Asset sales must be given more liberal regulatory treatment.
If loss is fully disclosed, lenders must be allowed to spread their losses on sale for over two years.
It will not be construed as restructuring if takeout financing is made possible over a longer period.
If specialized entities are acquiring ‘stressed companies’, leveraged buyouts must be allowed.
Steps must be taken to facilitate better functioning of Asset Reconstruction Companies.
Sector-specific Companies/Private equity firms must be helped to play an active role in the stressed assets market.
Loans moratorium on banks and NPAs
Banking sector performance had improved in FY20. Several PSU banks which were having high NPAs reported growth in earnings. Then the Covid-19 crisis emerged and loan moratorium was announced by RBI.
RBI had announced loan moratorium on banks to salvage borrowers due to Coronavirus. Loan moratorium means that the borrowers will not be required to pay interest and principal components of the loan to the bank during the moratorium period. This is to encourage borrowers to increase their spending and businesses to thwart low business confidence and expand and continue their businesses buoyantly so that economic growth does not be spoiled.
A stress test conducted by the RBI suggests that the RBI could push Indian banks’ gross bad loans to their highest in nearly two decades. Gross NPA declined to 8.5% in 2020 from 9.3% in 2019. Gross NPAs would rise to 15.2% by March 2021 from 11.3% a year earlier in the baseline scenario. In the “very severe stress” scenario, this could go as high as 16.3%.
Credit growth to corporates form 37% of total bank assets and generates 73% of NPAs. Credit growth to industry slowed to 0.8% in July 2020 as compared with 6.1% growth in July 2019.
Credit growth to food processing, mining, petroleum, coal & nuclear fuels, leather, wood industry, paper increased in July 2020. Sectors hit hard by the pandemic are tourism, aviation, entertainment, hospitality, petroleum, real estate and food.
Sectors performing well are pharmaceuticals, FMCG, ecommerce, utilities and IT sectors. Loans to these sectors are not likely to turn bad.
However, credit growth to chemicals, plastic, infrastructure, gems & jewellery, glass and beverage & tobacco decreased.
So we see that credit growth to sectors hit by pandemic will generate high NPAs.
Retail lending forms 22% of total bank lending and generates 3.7% of NPAs. Car loans, home loans and personal loans have low delinquencies and are good loans.
Personal loans performed well growing by 11.2% implying NPAs from this segment will be low and banks will enjoy higher margins.
Conclusion
Repo rate has been lowered substantially by the RBI since some time but banks have not much lowered their lending rates because of financial sustainability. So with the growth of loans in H1FY21 will translate into good earnings for banks despite the pandemic. Once moratorium is lifted and repayments start coming banks will become profitable. NPAs would rise and in this aspect RBI has asked banks to do provisioning, buffers and raise capital and thus be resilient organisations.
All banks are facing lot of problems due to various reasons.
PSBs are lifeline of the Indian economy and government should nourish them for their sustainability.
Only mergers of banks is not the only tool for economic growth. Interference by various political parties in functioning of the banks must be stopped.
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Explained: Why India's banks will face major NPA challenge in 2021
For banks in india, tackling the 'hidden' non-performing assets (npa) will be the biggest challenge in 2021 as loan defaults have spiked sharply in covid-hit 2020. many small and medium-scale companies are still struggling to repay dues owed to banks..
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The coronavirus pandemic has had a devastating impact on banks and financial institutions around the world as the global economic crisis has led to a rise in defaults and bad loans. The situation is particularly serious for Indian banks that are already struggling to cope with rising bad loans.
NPAs may erupt by 2022
A large number of individuals are also struggling to repay their loans after losing income or employment due to the historic economic crisis triggered by the coronavirus pandemic and the initial lockdown.
While banks have been reporting a decline in NPAs in the last few months, there is a high possibility that forbearance on asset classification is masking bad loans that are constantly on the rise, according to S&P Global Ratings.
The rating agency fears that financials institutions in India will find it difficult in maintaining the momentum after the amount of new non-performing loans declined in the first half to September 30. It also expects the Indian banking sector’s bad loans to shoot up to 10-11 per cent of the total loans as on March 31, 22 from eight per cent on June 30, 2020.
From the magazine | Fixing the banking mess
‘Hidden’ bad loans
The global rating agency also mentioned in its report that performance of Indian banks exceeded expectations in the second quarter, but added that much of it was due to the six-month loan moratorium and the Supreme Court’s decision barring banks from classifying loans as NPAs.
It said banks could have seen their NPAs rise by 10-60 basis points if it had not been for the top court's ruling. The top court had allowed banks to maintain loan accounts as standard even as borrowers defaulted.
Thousands of crores worth of loans have gone sour due to non-payment by borrowers and the amount of NPAs is likely to increase further. And the global rating agency is not too optimistic about the loan restructuring plan .
Read | High NPAs, sticky interest rates
“We estimate that more than half of our estimated restructured book may eventually slip into NPLs, leading to elevated NPL and credit cost levels in subsequent fiscal years," S&P Global Ratings said in its report.
While there are other problems like low corporate loan growth, the NPA problem seems to be the biggest “hidden” issue that may erupt by 2022 when relaxations like loan restructuring come to an end. But at the moment, the government and banks in the country are confident that there are enough provisions to absorb any forthcoming shock. Published By: Koustav Das Published On: Dec 29, 2020 --- ENDS ---
DOI: 10.36948/ijfmr.2024.v06i04.25476
Corpus ID: 271758094
An Empirical Study of Public and Private Sector Bank’s NPA for the Period of 2005-2021
Priyanka Singh , Prof. Harish Handa , Dr. Manoj Sain
Published in International Journal For… 30 July 2024
Economics, Business
Figures and Tables from this paper
6 References
A study of non-performing assets of commercial banks and it’s recovery in india, non performing assets and profitability of commercial banks in india : assessment and emerging issues, a study on npa of public sector banks in india, non performing assets- a review on the problems and solution taken by banks in india., related papers.
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Risk Management & NPA Management in Indian Banking Sector - 2 - UGC NET PDF Download
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Overview of NPA Management for Banks
NPA management holds immense importance for banks as it is crucial for controlling losses and safeguarding their financial stability. Banks employ various strategies to manage and recover NPAs present in their loan portfolios. These strategies encompass activities such as continuous engagement with borrowers to regularize repayments, restructuring of loans by adjusting terms and conditions, offloading NPAs to asset reconstruction companies, and resorting to legal actions like initiating proceedings in forums such as Debt Recovery Tribunals and the National Company Law Tribunal as per the provisions of the Insolvency and Bankruptcy Code.
Challenges Faced by Banks in NPA Management
Delayed Legal Systems: Legal processes can be protracted, leading to delays in the resolution of NPAs.
Poor Collateral Realization: Inadequate recovery from collateral assets can impede the NPA recovery process.
Lack of Clarity in Borrower Accounts: Unclear borrower accounts can hamper effective NPA management and recovery efforts.
Evergreening of Loans: The practice of evergreening loans can mask the true extent of NPAs, impacting the effectiveness of management strategies.
Disparities in Internal Processes: Variances in internal procedures among banks can pose challenges in NPA identification and resolution.
Extended Recovery Periods: The presence of challenges may prolong the duration required for NPA recovery.
Higher Haircuts on Loan Value: Difficulties in NPA management can result in larger write-offs from the loan principal.
Increased Bank Losses: Ineffective NPA management practices can lead to heightened financial losses for banks.
Significance of NPA Management in UGC-NET Commerce Examination
NPA management holds significant relevance in the context of the UGC-NET Commerce Examination. Understanding the intricacies of NPA management is imperative for students preparing for this examination. It is a topic that demands thorough comprehension for success in related assessments.
What is NPA Management?
Rising Non-Performing Assets (NPAs) pose a significant challenge for Indian banks, affecting their profitability and lending capabilities. Effective NPA management is essential to mitigate losses and uphold the financial well-being of banks. The government and Reserve Bank of India (RBI) have implemented reforms to enhance NPA resolution. These measures involve stricter RBI regulations for early NPA identification, establishing NPA reduction targets for banks, and enhancing banks' internal recovery mechanisms along with tools like the Insolvency and Bankruptcy Code (IBC). While the initiatives taken so far have shown some progress, more comprehensive actions are necessary for effective NPA management in Indian banks. This includes expediting legal procedures, reinforcing governance within banks, imposing stricter penalties on loan defaulters, and enhancing the expertise of bank personnel to address NPAs. Through collaborative endeavors, banks can curtail NPA levels and bolster their financial stability in the long run.
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All Points in Bullet Format:
Stricter RBI regulations for early NPA recognition.
Setting NPA reduction targets for banks.
Enhancing banks' internal recovery tools.
Utilizing mechanisms like the Insolvency and Bankruptcy Code (IBC).
Implementing faster legal procedures.
Reinforcing governance within banks.
Imposing stiffer penalties on loan defaulters.
Enhancing the skills of bank staff to tackle NPAs.
NPA Management in Banks
Non-performing assets or NPAs refer to loans and advances made by banks where the borrower has failed to make interest or principal repayments for at least 90 days. Rising NPAs pose a significant challenge for banks, affecting their profitability, asset quality, and ability to provide new loans. Effective NPA management is crucial for the financial health of banks.
Steps Taken by Banks for NPA Management:
Early Identification and Classification: Banks need to identify NPAs promptly and classify them correctly according to RBI guidelines.
Follow-up with Borrowers: Banks engage in proactive follow-ups with defaulting borrowers, negotiating repayment plans and restructuring loans if needed.
Loan Restructuring: Banks may restructure loans by adjusting repayment periods, reducing interest rates, or waiving penalties to facilitate easier repayment.
Asset Reconstruction: If efforts to recover NPAs fail, banks may consider selling NPAs to specialized Asset Reconstruction Firms for resolution.
Legal Actions: As a last resort, banks initiate legal proceedings against willful defaulters, approaching Debt Recovery Tribunals or the National Company Law Tribunal under the Insolvency and Bankruptcy Code for corporate loans.
Provisioning for Losses: Banks set aside provisions for expected loan losses to cover NPA-related costs.
Impact of Rising NPAs on Banks:
Profitability Impact: Increasing NPAs lead to higher provisioning, reduced interest income, and collateral devaluation, impacting the overall profitability of banks.
Lending Capacity: A surge in NPAs limits banks' ability to extend new loans, affecting their role in stimulating economic growth.
The RBI and government have implemented various measures to enhance NPA management, including stricter NPA recognition norms, loan restructuring schemes, advisory on loan sales, and interventions under the Insolvency and Bankruptcy Code. However, challenges persist due to delays in legal processes, lack of transparency, and the practice of evergreening loans.
Effective NPA management requires a comprehensive approach from banks that focuses on early detection, timely recovery efforts, aggressive legal action, and making internal goods. With concerted efforts, banks can rein in NPA levels and save their financial health over the long term. Yet, reforms to the legal system and regulatory frame also play an vital role in enabling better NPA key.
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How to Manage NPA?
NPA can be managed by the following:
Early Detection: Identifying non-performing assets at the earliest stage is crucial for effective management. Banks should employ robust systems to detect NPAs promptly.
Timely Recovery Efforts: Once identified, prompt action should be taken to recover the dues associated with NPAs. This may involve negotiations, restructuring, or collateral liquidation.
Aggressive Legal Action: Banks must be prepared to take legal action when necessary to recover non-performing assets. This can include filing cases in debt recovery tribunals or courts.
Internal Goods: Strengthening internal processes and controls can help prevent the creation of new NPAs. Banks should focus on improving credit appraisal mechanisms and risk management frameworks.
Effective NPA Management Strategies for Banks
Non-Performing Assets (NPAs) can significantly impact a bank's financial health. Implementing sound strategies can help banks manage NPAs effectively and minimize losses. Let's explore key steps that banks can take:
Early Identification and Categorization of NPAs
Banks need a robust system to identify NPA accounts early on, following RBI guidelines. Any default in payment for 90 days should trigger classification as an NPA. NPAs should be categorized as sub-standard, doubtful, or loss assets.
Regular Follow-up and Monitoring
Banks should maintain regular communication with defaulting borrowers through various channels like phone calls, letters, emails, and personal visits. The aim is to remind borrowers of repayment obligations, understand reasons for default, and explore resolution options.
Banks may provide incentives such as extending loan tenures or waiving penalties to facilitate repayment.
Loan Restructuring
When feasible, banks can restructure NPA loans by adjusting repayment schedules, offering moratoriums, or reducing interest rates. The goal is to enhance the likelihood of full or partial recovery while avoiding frequent restructuring.
Collateral Invocation
Banks have the option to invoke collateral against NPA loans and liquidate assets to recover funds. Challenges may arise from inadequate collateral valuation and delays in the legal process for asset disposal.
Filing of Legal Cases
In cases where efforts to recover NPAs through negotiations fail, banks should promptly initiate legal proceedings against willful defaulters. Legal actions can be pursued through Debt Recovery Tribunals and the National Company Law Tribunal under the Insolvency and Bankruptcy Code for expedited resolution.
Provisioning for Losses
Banks must make adequate provisions for loan losses to account for potential write-offs related to NPAs. This practice helps mitigate the impact of NPAs on the bank's profitability and is regulated by the RBI.
Enhancing Internal Capabilities
Banks should continually improve internal processes, utilize advanced technology, enhance staff skills, and strengthen governance frameworks to detect, manage, and resolve NPAs effectively in the long term. Technology plays a crucial role in monitoring loans, flagging risks, and streamlining operations.
By implementing these strategies cohesively, banks can enhance their NPA management practices and reduce financial losses. However, it's essential to complement internal efforts with external reforms to improve the overall NPA resolution landscape.
NPA Management Tools
Monitoring signals like declining cash flows, overdue bills, bouncing cheques, and negative borrower reports.
Tracking loan activities and identifying potential problematic accounts.
Assessing credit risk and default probability of each loan, with higher-risk loans receiving closer supervision.
Focusing on resolving NPAs by creating strategies, initiating legal actions, and monitoring resolution efforts.
Specifically designed for MSMEs, small loans, and accounts facing temporary issues, with a warning against frequent restructuring.
Purchasing large NPAs from banks and employing aggressive recovery methods.
Enhancing management of high-value NPAs to prevent evergreening and delays.
Delegating certain recovery tasks to specialized agencies.
Increasingly vital for automating processes, red flag identification, and evaluating resolution options.
Non-Performing Asset (NPA) Resolution Strategies
Restructuring and Rescheduling: Financial institutions collaborate with borrowers to reorganize or reschedule loans for more manageable repayment. This process might involve extending the loan tenure, reducing interest rates, or temporarily permitting interest-only payments.
Recovery through Legal Means: In case negotiations prove ineffective, financial institutions may resort to legal actions to reclaim the outstanding amount. This could include commencing legal proceedings, enforcing security interests, or liquidating collateral.
Loan Recovery Agencies: Some financial institutions enlist third-party agencies specialized in debt recovery to oversee the collection process. These agencies possess expertise in negotiating with borrowers and utilizing various recovery techniques.
International Monetary System
The international monetary system refers to the framework that facilitates international trade, investment, and capital flows among countries. It encompasses various institutions, rules, and conventions that govern global financial interactions.
Prevention of Non-Performing Assets (NPAs)
The prevention of Non-Performing Assets (NPAs) can be achieved through the following strategies:
Credit Risk Assessment: By implementing thorough credit risk assessment procedures, financial institutions can approve loans to financially stable borrowers, thereby reducing the chances of defaults.
Diversification of Portfolio: Spreading out the loan portfolio across various sectors and types of loans can help lower risks linked to overexposure in specific industries.
Early Warning Systems: Introduction of early warning systems that detect early signs of financial troubles in borrowers allows institutions to take prompt corrective measures to prevent loans from turning into NPAs.
Theory of Cost
Understanding the Theory of Cost is crucial for businesses to effectively manage their expenses and optimize profitability.
Rising Non-Performing Assets (NPAs) have become a significant challenge for Indian banks, impacting their profitability and ability to lend. Effective management of NPAs is crucial, and banks have a range of tools at their disposal for identification, control, and resolution of NPAs. While some progress has been made, concerted efforts from all stakeholders are necessary to reduce India's high levels of NPAs in the long term. Policy reforms, technological advancements, improved governance, and capacity-building within banks can collectively enhance their ability to manage NPAs more effectively. Despite the availability of various NPA management tools, the key challenge lies in their successful implementation. Banks must adopt a proactive and comprehensive approach that integrates all available options seamlessly.
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Essay on NPA and Banking Sector in India II SSC II Bank II Other Exams
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The rise in NPAs not only affects the banking sector but also poses a threat to the growing economy. The slowdown in the economy due to the piling of NPAs affects businesses in all sectors by curbing investments which in turn has an adverse impact on the economy and stock markets. While the NPA crisis in the banking sector began in the early ...
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Essay On NPA In Indian Banks
Three Main Types of NPAs: -. Substandard Asset. Doubtful Asset. Loss Asset. Substandard Asset. When a loan remains NPA for 12 months or less, it is called Sub-Standard Asset. In such a loan, the total assets or collateral of the borrower is not so much that the entire dues can be recovered from it. Doubtful Asset.
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From the 8856 billion the gross NPA was 476 billion which 5.4% of total advance. In 2018, the total advance of public sector banks was 61417 billion and the standard advance was 52461 billion with a 85.4% of total advance. The sub-standard advance and the doubtful advance were 2146 billion and 6277 billion.
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NPAs in India's banks: trends and determinants
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Solving the NPA Crisis in India
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Factors Affecting NPAs in Indian Banking Sector
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For banks in India, tackling the 'hidden' non-performing assets (NPA) will be the biggest challenge in 2021 as loan defaults have spiked sharply in Covid-hit 2020. Many small and medium-scale companies are still struggling to repay dues owed to banks. ... It also expects the Indian banking sector's bad loans to shoot up to 10-11 per cent of ...
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There is need to focus on NPA of every p ublic sector bank in India. ... For this study, secondary sources such as RBI papers, Statistical Tables pertaining to Banks in India, etc. are used to ...
Risk Management & NPA Management in Indian Banking Sector
Document Description: Risk Management & NPA Management in Indian Banking Sector - 1 for UGC NET 2024 is part of UGC NET preparation. The notes and questions for Risk Management & NPA Management in Indian Banking Sector - 1 have been prepared according to the UGC NET exam syllabus. Information about Risk Management & NPA Management in Indian Banking Sector - 1 covers topics like Net Interest ...
An Empirical Study of Public and Private Sector Bank's NPA for the
DOI: 10.36948/ijfmr.2024.v06i04.25476 Corpus ID: 271758094; An Empirical Study of Public and Private Sector Bank's NPA for the Period of 2005-2021 @article{Singh2024AnES, title={An Empirical Study of Public and Private Sector Bank's NPA for the Period of 2005-2021}, author={Priyanka Singh and Prof. Harish Handa and Dr. Manoj Sain}, journal={International Journal For Multidisciplinary ...
Risk Management & NPA Management in Indian Banking Sector
Document Description: Risk Management & NPA Management in Indian Banking Sector - 2 for UGC NET 2024 is part of UGC NET preparation. The notes and questions for Risk Management & NPA Management in Indian Banking Sector - 2 have been prepared according to the UGC NET exam syllabus. Information about Risk Management & NPA Management in Indian Banking Sector - 2 covers topics like Overview of NPA ...
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The work of our researchers helps the FDIC maintain a safe, sound, and vibrant banking sector. Papers, Studies, and Survey Reports. The Center publishes working papers, staff studies, survey reports, and other analyses to prompt discussion among the FDIC's many stakeholders to expand knowledge and understanding of issues that affect the ...
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IMAGES
COMMENTS
The rise in NPAs not only affects the banking sector but also poses a threat to the growing economy. The slowdown in the economy due to the piling of NPAs affects businesses in all sectors by curbing investments which in turn has an adverse impact on the economy and stock markets. While the NPA crisis in the banking sector began in the early ...
An example of NPA: Suppose the State Bank of India (SBI) gives a loan of Rs. 10 crores to a company (Eg: Kingfisher Airlines). ... Stress in banking sector causes less money available to fund other projects, therefore, negative impact on the larger national economy. ... Essay Writing Course for UPSC CSE (Online)
Three Main Types of NPAs: -. Substandard Asset. Doubtful Asset. Loss Asset. Substandard Asset. When a loan remains NPA for 12 months or less, it is called Sub-Standard Asset. In such a loan, the total assets or collateral of the borrower is not so much that the entire dues can be recovered from it. Doubtful Asset.
At present NPA in the banking sector is discussion issue because NPA is growing year by year mainly in nationalized banks The Gross Non-Performing Assets (GNPAs) of Nationalized Banks as on ...
Purpose. The level of non-performing assets (NPAs) best indicates the soundness of the banking sector of a country. The purpose of this study is an effort to look into the contribution of the different banks individually to the NPA in the industry by looking into its growth pattern during the period 2010-2017. Further, the study is made to look ...
From the 8856 billion the gross NPA was 476 billion which 5.4% of total advance. In 2018, the total advance of public sector banks was 61417 billion and the standard advance was 52461 billion with a 85.4% of total advance. The sub-standard advance and the doubtful advance were 2146 billion and 6277 billion.
Non-performing assets (NPAs) have plagued the Indian banking sector for long. NPAs refer to a classification for loans or advances that are in default and it is assumed that banks will not be able ...
Non-performing assets (NPAs) pose a significant challenge to the stability and growth of the Indian banking sector. According to the Reserve Bank of India (RBI), NPAs are loans where the borrower has failed to make interest or principal repayments for a period exceeding 90 days. The magnitude of NPAs in the Indian banking sector has
The paper has analysed the trends and determinants of the NPA crisis in India's banking sector, with a focus on understanding the drivers of the current phase of the crisis. We found that the PSBs have been badly affected. The NPA problem is not prevalent in private banks as a group, though their volume of loan defaults has increased.
Indian banks today hold the dubious distinction of having one of the world's worst asset quality ratios especially for the public sector banks.3 The proportion of non-performing loans (NPAs) in gross loans (GAs) went from about 2% in 2008 to over 10% in 2018. For the worst performing banks, the ratio is in excess of 20%.
In March 2018, non-performing assets (NPAs) at commercial banks amounted to ₹10.3 trillion, or 11.2% of advances. Public sector banks (PSBs) accounted for ₹8.9 trillion, or 86%, of the total NPAs. The ratio of gross NPA to advances in PSBs was 14.6%. These are levels typically associated with a banking crisis.
Abstract. Banking sector is the backbone of any economy, so it is necessary to focus on its performance which is largely affected by its non-performing assets (NPAs). In the year 2018-2019, NPA of scheduled banks was Rs 355,076 Crore which is 3.7% of net advances. The purpose of this study is to identify the determinants based on analysis ...
There has been increased concern about the continued deterioration in the asset quality of Indian public sector banks in recent times. Reserve Bank of India's Financial Stability Report 2017 acknowledged that the risks to the Indian banking sector have been increasing in the post-recession period, particularly, the risk of accumulating non-performing assets (NPAs). In this perspective, the ...
According to the Reserve Bank of India's Financial Stability Report of December 2017, they currently stand at 10.2 per cent of all assets, while stressed assets, which are believed to be NPAs in ...
Abstract. This paper narrates the story of the evolutionary journey of non-performing assets (NPA) in the Indian banking sector. Three distinct phases of the intertemporal behavioral of NPAs of the Indian banking sector can be discerned. First, since the initiation of financial sector reforms till about the beginning of the North Atlantic ...
Purpose The level of non-performing assets (NPAs) best indicates the soundness of the banking sector of a country. The purpose of this study is an effort to look into the contribution of the ...
Indian banking sector is facing the problem of rising bad loans as gross non-performing assets (GNPA) of Indian banks is on continuous rise. The present study is an attempt to analyse rising bad loans scenario of Indian banks, various factors that contributes to non-performing assets (NPA), along with the present state of Indian banks.
Essay on NPA Crisis in India. Non-Performing Assets (NPA) is the biggest overhang on credit growth and banking sector health in India and is great concern for the banking system and economy. There are various reasons for growing banking NPAs including bad credit decisions, poor monitoring, laxity in vigilance, routine business downturns etc. Huge NPA has prompted the government to initiate ...
Gross NPA declined to 8.5% in 2020 from 9.3% in 2019. Gross NPAs would rise to 15.2% by March 2021 from 11.3% a year earlier in the baseline scenario. In the "very severe stress" scenario ...
The NPA situation of India has been improving; especially in Mudra loans, it has shown quite promising results. Gross NPAs of public sector banks against Mudra loans have come down drastically from 4.77 per cent in 2020-21 to as low as 3.4 per cent in 2023-24. Even for private sector banks, there is a drop in NPAs due to Mudra loans to 0.95 per ...
Neha Rani (2014) in her research paper "Analysis of Non-Performing assets of Public Sector banks" revealed that share of nationalized banks in priority sector NPA was greater in 2008 but after that it is decreasing. However amount of NPA of both banks is increasing but there percentage share in total NPA is decreasing after 2010 continuously.
For banks in India, tackling the 'hidden' non-performing assets (NPA) will be the biggest challenge in 2021 as loan defaults have spiked sharply in Covid-hit 2020. Many small and medium-scale companies are still struggling to repay dues owed to banks. ... It also expects the Indian banking sector's bad loans to shoot up to 10-11 per cent of ...
There is need to focus on NPA of every p ublic sector bank in India. ... For this study, secondary sources such as RBI papers, Statistical Tables pertaining to Banks in India, etc. are used to ...
Document Description: Risk Management & NPA Management in Indian Banking Sector - 1 for UGC NET 2024 is part of UGC NET preparation. The notes and questions for Risk Management & NPA Management in Indian Banking Sector - 1 have been prepared according to the UGC NET exam syllabus. Information about Risk Management & NPA Management in Indian Banking Sector - 1 covers topics like Net Interest ...
DOI: 10.36948/ijfmr.2024.v06i04.25476 Corpus ID: 271758094; An Empirical Study of Public and Private Sector Bank's NPA for the Period of 2005-2021 @article{Singh2024AnES, title={An Empirical Study of Public and Private Sector Bank's NPA for the Period of 2005-2021}, author={Priyanka Singh and Prof. Harish Handa and Dr. Manoj Sain}, journal={International Journal For Multidisciplinary ...
Document Description: Risk Management & NPA Management in Indian Banking Sector - 2 for UGC NET 2024 is part of UGC NET preparation. The notes and questions for Risk Management & NPA Management in Indian Banking Sector - 2 have been prepared according to the UGC NET exam syllabus. Information about Risk Management & NPA Management in Indian Banking Sector - 2 covers topics like Overview of NPA ...
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