The primary purpose of banks is to take deposits and provide loans to the public and businesses. When a borrower takes a loan from a bank, he is obliged to pay the principal amount plus interest on that amount. However, when a borrower fails to pay the interest or the principal or both, the bank loses money. Then, the loan given by the bank is termed a Non-Performing Asset. An NPA is also known as a bad loan. We can see a rising number of bad loans in India, which is harmful to the banking sector and the economy in general.
Reasons for the rising Non-Performing Assets in the Indian banking sector
It is seen that the Indian banking sector is going through severe problems due to rising NPAs. However, the problems related to bad loans in public sector banks are much more than in private banks. Some important reasons are:
1. Credit boom: At the time of the credit boom in the year 2003-2004, it was seen that the problem of rising NPA was increasing rapidly. During this period, the world economy and the Indian economy were flourishing. Seeing this scenario, many Indian firms borrowed huge amounts to take advantage of the opportunities and grow their businesses.
2. Tightened Monetary Policy: During that time, the Reserve Bank of India tightened the monetary policy in the country. It increased the repo rate and reserve repo rate. Rising cases of NPAs were still prevalent even after those steps were taken.
3. Stalled Judiciary & Legislative Procedures: The courts in India gave judgements that were not in favour of businesses. The judgements negatively affected businesses, specifically the mining, power and steel divisions. Furthermore, the businesses had to face problems regarding the acquisition of land because of which many projects got stalled due to which the repayments have been not done by many current NPA defaulters.
4. Intentional Defaults: It is also observed that many borrowers are totally competent to pay the loan, but they are deliberately not paying. Such people must be identified, and appropriate measures should be taken to recover the money lent to them.
5. Poor Credit Appraisal System: The lack of proper credit appraisal is another factor for the rise in NPAs. Because of poor credit appraisal, sometimes the bank gives loans to those who cannot pay back the loan.
6. Natural Calamities: Natural calamities are also a factor creating an alarming rise in NPAs in public sector banks. India is hit by one or the other major natural calamity very often that causes failure of repayment of loans by the borrowers. Generally, the farmers are dependent on rainfall for their crops. However, the irregularity in rainfall reduces the production level of the farmer, and as a result, he is unable to repay the loan.
Steps to Tackle NPAs
The problem of NPAs has been going on for a long time in India, and the government of India is taking various steps at legal, financial, and policy levels. Some of them are:
Credit Information Bureau
A sound information system is needed to prevent the loan from falling into a bad hand. It helps maintain and share information about individual and wilful defaulters.
Lok Adalats
Lok Adalats help retrieve small loans up to 5 lakhs. Lok adalats are positive in a sense they avoid more cases in the legal system.
SARFAESI Act
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act allow the banks and financial institutions to recover the loan amount by auctioning the properties of the defaulter. However, the bank is required to issue a notice first, and if the borrower still fails to pay the amount, appropriate actions can be taken.
Conclusion
NPAs wear out the capital of the banks and also become their financial strength. It is both a political and financial issue. Bad loans are a huge problem for Indian banks as it directly impacts their profitability. Other sectors are also affected because of the failure of banks. Therefore, banks and financial institutions must take the necessary steps to tackle the NPA issue. They must ensure fair and effective retrieval of loans which enables the smooth functioning of the banking sector. The banks must be active in adopting policies that help prevent NPAs.