CONNECTING THE DOTS #2 : PROBLEM OF NPA

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Oracle IAS, the best coaching institute for UPSC/IAS/PCS preparation in Dehradun (Uttarakhand), brings to you views on important issues.

What is NPA

  • A loan is declared NPA if the borrower fails to pay interest/principle for a period of 90 days.
  • For agricultural loan it depends on cropping cycle.

 SOME FACTS (DATA)

  • According to the official figures, the gross NPA of PSBs and private sector banks is 7.34 lakh crore and 1.38 lakh crore rupees respectively.(~9.6 lakh crore)
  • The total NPA is ~9.1 % of total assets (12% for PSBs).
  • Out of 9.6 lakh crore, 10 companies constitute ~4 lakh crore.
  • Within the BRICS it is highest for Russia. India ranks second.

Most Vulnerable sector

RBI’s financial stability report names the basic metal and cement industries as most indebted with construction, infrastructure and automobile industry also accounting for sizeable chunks of banks’ NPAs.

Reasons for NPA

REASONS FROM COMPANY SIDE:

 

  • The funds borrowed by the company for a particular purpose were diverted.
  • Business failures.
  • Willful defaulters constitute ~21% of total NPAs of PSBs
  • Stressed sectors like Electricity (state electricity boards), Steel, Infrastructure, textiles, mines etc.
  • General Economic slowdown due to demonetization and tardy implementation of GST.

 

REASON FROM BANK SIDE:

 

  • Poor credit appraisals by banks.
  • PSBs provide loans under various compulsion that might not have sound business logic.
  • Lending under political pressure egs. PSBs compelled to give loans to stressed sectors like infrastructure.
  • Aggressive lending during economic upturn without due diligence.
  • Accounting tricks: Asset quality review unearthed the problem of subdued NPAs. These NPAs were hidden in the bank’s balance sheet but were not reflected properly. Hence the NPAs were being accumulated over the years.

Effect of NPA on Economy

 

  • NPAs shrink bank resources, reduce lending power as the bank have to keep more resources for accumulating losses. (One leg of Twin balance sheet problem)
  • Banks don’t give loans to companies in fear of loss. (Other leg of Twin balance sheet problem).
  • Put pressure on government to infuse capital. (fiscal deficit breach)
  • All the above lead to macro economic instability and economic slowdown.

Steps by Government /RBI

 

  • The government has announced 2.11 lakh crore of  bank re-capitalization funds.(Indhradhanush, Gyan sangam)
  • PJ Nayak committee on bank governance recommendation being implemented. Egs. Bank board Bureau created: Step towards letting PSBs be professionally and independently managed.
  • Insolvency and Bankruptcy code (2016) passed for fast resolution.
  • The RBI has taken many initiatives: S4A scheme, 5:25 scheme for infra loans, Strategic debt restructuring

 

Non resolution of NPA issue:

 

  • RBI measures did not meet success: CDR, SDR, S4A, 5-24 schemes were just deferring the NPA issue.
  • As per economic survey
    • Poor loss recognition by banks and reluctant to conduct Asset quality review
    • Failure of Private sector ARCs (asset reconstruction companies): Were only able to resolve 5 % of total NPA.
    • Reluctance to write down loans: Bank managers afraid of accusation of favoritism and 4Cs- courts, CVC, CBI,CAG which  is leading to ever greening of loans.
    • Lack of fiscal space for the government and ‘moral hazard’ associated with using public money.

WAY FORWARD

  • International experience (eg. SE ASIA) show that ARCs with government support can assist in resolving NPA issue. The PARA bank (Public Sector Asset Rehabilitation Agency) as recommended by the Economic Survey can be tried.
  • Proper implementation of Bankruptcy and insolvency Code.
  • Strict action against willful defaulters.
  • Depolitisation of banking operation: Implementing PJ Nayak committee recommendation in letter and spirit.
  • Loan waivers and other popular schemes should be avoided.

Conclusion

The solution will lie at economy growing at a fast pace. Much of the bad debt has arisen because of business cycle. It has become a vicious cycle. For economy to turnaround, the banks have to lend and bring investments which the economy requires. But as there is a shortage of capital in the banking industry, there will be hesitation in banks to fund the large products.

Also, there is need for better private bond market where not banks finance it but they are issued publicly. Insolvency and bankruptcy code is going to help fighting the NPAs. But there is no short term solution to the NPAs. The re-capitalization should be effectively utilized so that in next 2 years, it will help banks in lending without injuring the balance sheet.


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