BAD LOANS AND NPAS - ECONOMY
News:
Bad loans come down further, gross NPAs at 3.6% by next March
What's in the news?
● The
gross non-performing assets (GNPA) of the country’s scheduled commercial banks,
which declined to a 10-year low of 3.9
percent in March 2023, is expected to fall further to 3.6 percent by March
2024.
Key takeaways:
● If
the macroeconomic environment worsens, though, the GNPA ratio may rise sharply,
the central bank said in its Financial Stability Report (FSR) for June 2023.
● The
estimate for GNPA for March 2024 is based on the macro stress tests performed
to assess the resilience of banks’ balance sheets to unforeseen shocks
emanating from the macroeconomic environment.
● One
of the reasons for the fall in gross NPA in 2022-23 was large write-offs by banks.
Bad Loans:
● A
bad loan is that which has not been
‘serviced’ for a certain period.
○ Servicing a loan
is paying back the interest and a small part of the principal depending on the
agreement between bank and borrower.
● Bad
loans are where there is less certainty that the loan would be paid back in
full.
Non-Performing Assets (NPA):
● NPA
refers to a classification for loans or advances that are in default or are in arrears on scheduled
payments of principal or interest.
● In
most cases, debt is classified as non-performing, when the loan payments have
not been made for a minimum period of 90
days.
Gross non-performing assets (GNPA):
● Gross
non-performing assets are the sum of all
the loans that have been defaulted by the individuals who have acquired
loans from the financial institution.
Net non-performing assets (NNPA):
● Net
non-performing assets are the amount that is realized after provision amount has been deducted from the gross
non-performing assets
Stressed assets vs NPA:
● Stressed
Asset = NPAs + Restructured assets + Written off assets.
○ NPA is the part of
stressed assets.
Restructured assets or loans:
● These
are assets which have an extended
repayment period, reduced interest rate, converting a part of the loan into
equity, providing additional financing, or some combination of these measures.
Hence, under restructuring a bad loan is modified as a new loan.
Written off assets:
● Written
off assets are those the bank or lender doesn’t
count the money the borrower owes to it.
● The
financial statement of the bank will indicate that the written off loans are
compensated through some other way.
● There
is no meaning that the borrower is pardoned or got exempted from payment.
Causes for NPAs in Banking Sector:
1. Financial crisis:
● Before
the financial crisis of 2008 India’s economy was in a boom phase.
● During
this period banks lent extensively to corporates in the expectation that the
good times will continue in future.
2. Low earning of the corporates:
● Low
earnings affected their ability to pay back loans. This is one of the most
important reasons behind the increase in NPA of public sector banks.
3. Relaxed lending norms:
● Another
major reason for rising NPA was the relaxed lending norms for corporate houses.
● Their
financial status and credit rating were not analyzed properly.
4. Public Sector banks:
● It
provides a major portion of the credit to industries and it is this part of the
credit distribution that forms a great portion of NPA.
5. Priority sector lending (PSL) sector:
● This
has contributed substantially to the NPAs. Priority sectors include
agriculture, education, housing, MSMEs.
6. Credit default by promoters:
● There
are also cases of credit default by promoters, where the funds have been
diverted by over-invoicing imports, sourced via a promoter owned subsidiary
abroad or exporting to shell companies and then declaring that they defaulted.
Steps taken so far to reduce NPA:
A comprehensive 4R’s strategy,
consisting of recognition of NPAs transparently, resolution and recovery of
value from stressed accounts, recapitalization of PSBs, and reforms in PSBs and
the wider financial ecosystem for a responsible and clean system.
1.Recognition:
● Asset Quality Review
2.Resolution and Recovery:
● Debt Recovery Tribunal - The
Debts Recovery Tribunals (DRTs) and Debts Recovery Appellate Tribunals (DRATs)
were established under the Recovery of Debts and Bankruptcy Act (RDB Act), 1993
with the specific objective of providing expeditious adjudication and recovery
of debts due to Banks and Financial Institutions.
● Insolvency and Bankruptcy
code, 2016 - The code repealed all previous
legislation and established a standardized framework for resolving insolvency
and bankruptcy cases. It enables creditors to analyze a debtor’s viability as a
business decision. Furthermore, creditors might either agree to the plan for
its resurrection or propose a quick liquidation.
● National company law
tribunal - Under the Insolvency and Bankruptcy
Code, 2016, the NCLT also serves as the Adjudicating Authority for insolvency
proceedings.
● Asset Reconstruction
Company - National Asset Reconstruction Company Ltd.
(NARCL) has been set up by banks to aggregate and consolidate stressed assets
for their subsequent resolution. PSBs will maintain 51% ownership in NARCL.
● India Debt Resolution
Company Ltd. (IDRCL) - IDRCL is a service
company/operational entity which will manage the asset and engage market
professionals and turnaround experts. Public Sector Banks (PSBs) and Public FIs
will hold a maximum of 49% stake and the rest will be with private sector
lenders.
● SARFAESI Act - The
Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002, more commonly known by its shorter name SARFAESI
Act, is a legislation that allows banks and other financial organizations to
recover bad loans effectively. The act can be utilized to tackle the problem of
Non-Performing Assets (NPAs) through different procedures. However, this is
possible only for secured loans. For unsecured loans, banks should move the
court to file a civil case of defaulting.
3.Recapitalization of PSB:
● Recap bonds
- Recapitalization bonds are dedicated bonds to be issued at the behest of the
government for recapitalizing the trouble hit Public Sector Banks (PSBs). Bonds
worth Rs 1.35 trillion are to be issued to inject capital into PSBs who are
affected by high levels of NPAs. Recapitalization bonds are proposed as a part
of the Rs 2.11 trillion capital infusion package declared by the government on
October 24th, 2017. In December 2018, the government announced the issue of
additional Rs 41000 crores worth of recapitalization bonds.
● Budgetary
recapitalization
4. Reforms:
● Financial Institution Services
Bureau - The Financial Services Institutions Bureau
will select the chiefs of public sector banks and insurance companies.
● Merging of Banks
● Disinvestment of banks