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Non-Performing Assets

Non-Performing Assets
What are non-performing assets?
A nonperforming asset (NPA) refers to a classification for loans or advances which are in default or are in arrears on scheduled payments of principal or interest. Debt is classified as nonperforming when loan payments have not been made for a period of 90 days, which is the standard, but the amount of elapsed time may be shorter or longer depending on the terms and conditions of the loan.

The Reserve Bank of India clarifies that an asset, including a leased asset, becomes non­performing when it ceases to generate income for the bank.

What are the types of non-performing assets?
The most common NPAs are term loans, but there are other loans which can become nonperforming:

•Overdraft and cash credit accounts left out-of-order for more than 90 days.

•Agricultural advances whose interest or principal installment payments remain overdue.

•Bill overdue for more than 90 days for bills purchased and discounted.

•Expected payment is overdue for more than 90 days in respect of other accounts.

•Non-submission of stock statements for 3 consecutive quarters in case of the cash-credit facility.

•No activity in the cash credit, overdraft, EPC, or PCFC account for more than 91 days.

NPAs are divided into different criteria:

•Substandard asset- An asset that remains as NPA for less than or equal to 12 months.

•Doubtful Asset- An asset that remained in the above category for 12 months.

•Loss Asset- An asset where loss has been identified by the bank or the RBI, however, there may be some value remaining in it so the loan has not been not completely written off.

What are the causes behind the unprecedented growth in NPAs?
•Diversification of funds to unrelated business/fraud.

•Business losses as a result of changes in the regulatory environment.

•Lack of morale.

•Global, regional or national financial crisis.

•The general slowdown of the entire economy.

•The slowdown in a specific industrial segment, such as Coal, where constituent companies may soon become NPAs.

•Unplanned expansion of corporate houses during the boom period and loan taken at low rates later being serviced at high rates.

•Wilful defaulters.

•Extreme market competition.

•Due to natural calamities.

•Increasing imports leading to domestic losses in internal businesses.

What are the effects that NPAs have on the economy?
•They become a huge headache for banks which lose income. Stress in the banking sector causes less money available to fund other projects which leads to a collective impact on the larger national economy.

•Higher interest rates by the banks to maintain the profit margin.

•Increase in unemployment due to incomplete investments.

•The government receives less dividends if the NPAs pertain to the public sector banks.

•It dissuades investors from investing in other projects.

•Balance sheet syndrome.

•NPAs related cases add more pressure to already pending cases with the judiciary.

Where does India stand with reference to the issue of NPAs?
Currently, India is facing a very serious NPA problem. More than 35 defaulters have fled the country and most banks are running with low incomes due to mounting NPAs. More than Rs. 7 lakh crore worth loans are classified as Non-Performing Loans in India. The figure roughly translates to near 10% of all loans given, which means that about 10% of loans are never paid back, resulting in substantial loss of money to the banks.

Economists believe that a mounting NPA crisis can have greater implications such as the crash of the national banking system which brings more troubles for a developing economy such as India.

What are the steps taken to tackle this?
The Narasimhan Committee back in 1991 had recommended many reforms to tackle the NPA problem. This shows that this issue is not new to India but is a result of mounting over many years. Some of the important measures are:

•Credit Information Bureau, 2000: an efficient information system prevents the loan from 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 handle small loans and advances, but are limited up to 5 lakh rupees loans by the RBI guidelines issued in 2001. They solve the issue of increasing pressure on the judiciary to solve cases regarding NPAs.

•SARFAESI Act, 2002: The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act permits 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.

•Corporate Debt Restructuring, 2005: This reduces the debt burden on the company by decreasing the rates paid and increasing the time the company has to pay the obligation back.

•5:25 Rule, 2014: This is also known as Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries.

•Joint Lenders Forum, 2014: This includes all PSBs whose loans have become stressed.

•Mission Indradhanush, 2015: This is 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.”

A - Appointments.

B - Bank Board Bureau.

C - Capitalization.

D - Destressing.

E - Employment.

F - Framework of Accountability.

G - Governance Reforms.

•Asset Quality Review, 2015: This was formed to classify stressed assets to secure the future of the banks and further early identification of the assets and prevent them from becoming stressed by appropriate action.

•Insolvency and Bankruptcy Code Act, 2016: This aims 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 Asset Reconstruction Companies vs. Private Asset Reconstruction Companies, 2017.

•If the lenders do not adhere to the timelines for resolution process, try to conceal the status of accounts or indulge in ever greening of stressed assets then the RBI may take strict actions against them which may extend to imposing monetary penalties.


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