A Brief Study on NPA: Impact on Banks

An asset in any firm refers to its resources that hold a certain economic value, and that economic value can provide future benefit to the firm. Thus, according to RBI (Reserve Bank of India), for any asset on which the interest remains unpayable for a period of 90 days, the asset becomes non-performing. These non-performing assets decrease the profitability of banks in the country, as the bank gains a negative image and the account holders lose their trust in them. Talking globally, India ranks 5th in dealing with the NPAs. According to the surveys, the gross NPAs of the banking sector on June 30, 2018, were 11.52%, whereas, on March 31, 2018, the gross NPA was 11.68%. The NPAs on public sector banks in 2019 were approximately 7.3 trillion INR, whereas, in 2021, it is approximately 6 trillion INR. Let’s study the causes of the rise in NPA, its impacts on banks, and the measures taken to reduce NPAs in detail.

Causes of Rising of NPAs in Indian Banks

The major causes that give rise to NPAs in the banking sector are as follows:

• The economy of India was blooming in the early 2000s, due to which the banks provided a considerable amount of loans to businessmen and companies. However, these companies were not able to carry out their functions and were not able to pay their debts too. This led to the rising costs and the recession of 2008.
• The relaxed lending norms to the corporate houses contribute greatly to the increase of NPAs in the banking sector. The banks provide unsecured loans without proper analysis, which greatly contributes to the increase of NPA.
• There were bans on mining projects, which greatly affected the industries such as the iron and steel sector. Their operating cost was higher than their income, thus, they were unable to pay back their loans to the banks. This mainly affects the public sector banks of India. 
• The priority sector lending contributes to the increment of NPA by giving loans for agriculture, education, MSMEs and housing. The education loans alone contribute about 20% of the NPAs of the SBI.

Impact of NPAs on Banks

The most basic impacts of NPAs on the banks of India are as follows:

• The increase in NPAs reduces the profitability of the banks due to their lack of credibility. This NPA also harshly affect the capitals base of the public sector banks. Due to the continuous rise of NPAs of any bank, the condition becomes chronic, and the banks face severe crises while trying to stabilise again.
• The account holders lose their trust in the banks and want to withdraw their money. This hugely affects the banking system and the bank teeters on the verge of collapse. 
• The banks are forced to decrease their interest rate on saving deposits to increase the margin as a result of high NPA. 

Thus, we can conclude that the high NPA on banks creates a negative impact on both the credibility and functioning of the banks.

Classification of NPAs

The banks classify NPAs into three primary categories, which are as follows:

1. Substandard assets: The asset that has been in the NPA for only 12 months or lesser, these types of assets are Substandard assets.
2. Doubtful assets: Any asset that is in the state of non-performing for more than 12 months is a doubtful asset of NPAs.
3. Loss assets: The loss assets are the case of non-payment for a longer period. As the name suggests, in the lost assets of the banks, an auditor or any inspector identifies the loans that will never be repaid and should be fully written off.

Nationalised Banks

The list of some of the nationalised banks of India are as follows:

• Allahabad Bank
• Bank of Baroda.
• Bank of Maharashtra.
• Central Bank of India.
• Canara Bank.
• Dena Bank.
• Indian Bank
• Bank of India.

Strategies to Solve the Problem of NPAs in Banks

Several measures or strategies can be taken to solve the problem of NPA in banks and to increase the profitability of banks, some of which are as follows:

• It is necessary to make senior executives of the company accountable for the lapses, instead of blaming the junior executives.
• There is a certain need for the betterment of corporate governance over the banks.
• The government should give the banks more authority to eradicate the problem of high NPAs.
• The Effective Management Information System (MIS) is a must to implement for maintaining effective credit risk management.
• To check the stressed assets, there should be the setting up of reconstruction companies.

Conclusion

NPAs, or non-performing assets, are those assets on which the interest remained unpaid for a period of 90 days. These non-performing assets negatively affect the functioning of the banks. It greatly reduces the profitability of banks, and can also cause the collapse of the banking sector. Talking globally, India ranks 5th in dealing with the NPAs. The NPAs on public sector banks in 2019 were approximately 7.3 trillion INR whereas, in 2021, it is approximately 6 trillion INR. There are several measures, such as making the senior executive accountable, proper governance, strict laws by the government etc., that can be implemented to eradicate the problem of NPA completely from the Indian banking sectors.