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A non-performing asset is one on which the interest remains unpayable for about 90 days, resulting in the assets becoming non-performing. These non-performing assets greatly affect the smooth working of a bank and decrease its profitability. The increase in non-performing assets creates a bad image for the bank, resulting in account holders wanting to withdraw their money and close their accounts. This can cause a great loss to the bank or the bank may even collapse. Low earnings can be one of the main causes of the inability to pay back loans to the bank. Other factors can be improper governance within the bank and the lack of strict laws by the government. The NPA of India ranks fifth globally.
NPA (Non-Performing Assets)
In March 2018, the gross non-performing assets of Indian banks together were about 10.25 lakh crore INR. The contribution of Public Sector Banks to this was 8.97 lakh crores INR. However, various government schemes of recognition, recapitalisation, reforms and resolution have greatly helped in decreasing the NPA. The NPA recorded on March 31, 2019, was INR 7,39,541 crore and on March 31, 2020, was INR 6,16,616 crore.
Banks classify these non-performing assets into three categories, these are as follows:
1. Substandard assets: Assets that have been in the NPA for only 12 months or less 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.
3. Loss assets: Loss assets include cases of non-payment for a longer period. As the name suggests, in the lost assets, the banks, auditor or any inspector identifies the loans that will never be repaid and should be fully written off.
Factors behind High NPA Growth
The major factors that lead to high non-performing assets are as follows:
India’s economy was booming in the early 2000s and the banks gave out loans to different companies and businessmen. However, these businessmen and companies were unable to pay back loans. Thus, most of the current NPAs are from those losses incurred.
Political factors such as capitalism also contributed to the increase of NPAs.
There were a lot of cases of fraud that increased day by day contributing to the increase of NPA.
There were bans on mining projects that greatly affected industries, such as the iron and steel sectors. 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 in India. 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 adds to an increase in NPAs.
Priority sector lending contributes to the increment of NPAs through loans for agriculture, education, MSMEs and Housing. Education loans alone contribute about 20% of the NPAs of the SBI.
SBI lent a great number of loans to Kingfisher Airlines at the time of its financial crisis, however, the bank was unable to completely recover that amount.
There are many cases of credit default too that led to growth in NPAs, where investors swap their credit risk with other investors.
Measures to Eradicate the Problem of NPA
Several measures that can help in the eradication of the NPA problem are as follows:
Evaluation of the borrower’s CIBIL (credit information bureau limited) score is a must.
For settlement of disputes, use schemes such as Lok Adalat that provide faster settlement of disputes.
The government should take strong measures against defaulters. Many legal reforms are implemented such as the insolvency and bankruptcy code.
Holding senior executives accountable instead of the junior executives is a must.
Improving corporate governance of banks.
Implementation of an effective MIS (Management Information System) is necessary for maintaining effective credit risk management.
Setting up reconstruction companies to keep a check on all the stressed assets.
Conclusion
Non-performing assets are those assets on which the interest remains unpaid for a given period i.e. 90 days. These assets thus become non-performing and do not generate any interest to the bank. However, the banks still have to pay the interest on their deposits. Thus, the profitability of the banks eventually decreases to a great extent. One of the major factors that led to an increase in the current NPA was the incapability of the companies and businessmen to pay back loans they took from banks in early 2000. Low earnings can be one of the main causes of the inability to pay back loans to the bank. Other factors can be improper corporate governance and no strict laws made by the government. There were many cases of fraud and corruption that also contributed to the increased NPA.
