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What exactly is a ‘Non-Performing Asset
NPA ‘ A classification used by financial institutions that refer to loans that are in jeopardy of default. Once the borrower has failed to make interest or principal payments for 90 days the loan is considered to be a non-performing asset.
The unabated rise in stressed assets of the Indian banking sector is a cause for concern for the economy. The Reserve Bank of India (RBI) India’s central bank brought out a discussion paper on how to tackle the problem of rising NPAs
The problem is acute particularly among the state-owned Public Sector banks. With the economic growth rate slowing down to less than 5% now there is additional stress on bank loans. According to RBI, with the slowdown of the Indian economy, a number of companies/projects are under stress. As a result, the Indian banking system has seen increase in NPAs and restructured accounts during therecent years. Therefore, there is a need to ensure that the banking system recognises financial distress early, takes prompt steps to resolve it, and ensures fair recovery for lenders and investors.
Why the Concern?
The Reserve Bank of India (RBI) has raised concerns about the sharp rise of stressed assets in the infrastructure sector, which have shot up from 8.4 per cent to 29.2 per cent in one year till March 2014, its annual report for 2013-14 said. Excessive lending to the infrastructure sector which was plagued with execution issues is the primary reason for this. While the private banks were a bit circumspect in lending to the troubled sector, PSU banks went all out. Not denying the fact that lending practices at PSU banks are fraught with corruption. The recent case of Syndicate Bank highlights how corporates with poor financial standards can easily get loans by greasing the palms of CEOs at PSU banks.
While infrastructure growth is necessary, it should not be at the cost of asset quality. Government should take steps to improve the working environment in the infrastructure sector. This shall improve the repayment capacity of the companies. Also, banks, especially PSUs, should adopt a more rational approach and not lend to the sector carelessly. Else their asset quality will worsen further.
Ordinary borrowers often complain about difficulty in getting loans, while some large borrowers just get it very comfortably.
As they say banks lend money to those who already have enough of it . Haha..!! 😀
Growth in NPA’s
Non-performing assets (NPAs) of the banks, especially public sector banks (PSBs), have been going up sharply recently. According to one of the estimates, the gross non-performing assets (NPAs) of listed banks rose 35.2% to Rs2.43 lakh crore during the first three quarters of the current financial year. In absolute terms, the 40 listed banks added Rs63,386 crore to their gross NPAs during the nine months till December 2013, with State Bank of India (SBI), the largest lender in the country, leading with an accretion of Rs16,610 crore. The rising NPAs have set the alarm bells ringing all across. The finance ministry has asked banks to work on ways and means of recovering NPAs at the earliest.
The rising incidence of NPAs has been generally attributed to the economic slowdown. It is believed that with economic growth slowing down and rate of interest going up sharply, corporates have been finding it difficult to repay loans, and it has added up to rising NPAs. Even finance minister P Chidambaram stated that bad loans are a function of the economy and hence, having bad loans during distressed times is very natural. But do bad loans rise only because of economic distress?
Reasons of Growth in NPA’s
So what is it that is causing burgeoning of NPAs? Is it the approach of banks towards loans, which is wait and watch approach or the credit sanctioning processes of the banks itself? Are there other factors as well contributing to the rise in NPAs? The wait and watch approach of banks have been often blamed as the reason for rising NPAs as banks allow deteriorating asset class to go from bad to worse in the hope of revival and often offer restructuring option to corporates. A Parliamentary panel, examining increasing incidents of NPAs, has observed that state-owned banks should stop “ever-greening” or repeated restructuring of corporate debt to check the constant accumulation of their non-performing assets. Members of the panel were of the view that NPAs are the result of bad economic situation, but there were also management issue of every-greening of loans, which could be avoided by “not renewing loans, particularly of corporate”. This analysis clearly points out that banks’ approach towards NPAs has been a reason for aggravation of bad loans.
Coming to the contribution of credit assessment process, banks need to be more conservative in granting loans to sectors that have been traditionally found to be contributors of NPAs. The credit sanctioning process of banks need to go much more beyond the traditional analysis of financial statements and analyzing the history of promoters. There is a need to incorporate significance of economic factors in the credit assessment process. Also, banks need to evolve strategy through which defaulters are kept out of system unless they honour the previous payment. It is obvious that credit bureaus have failed to obtain this objective as their reports giving credit history of corporate have been inadequate in capturing repeated defaults by same borrower.
Causes and effects
1. Public Sector banks provide around 80% of the credit to industries and it is this part of the credit distribution that forms a great chunk of NPA. Last year, when kingfisher was marred in financial crisis, SBI provided it huge amount of loan which it is not able to recover from it.
2. If Indian industry is in crisis, it is bound to hit the banking sector and their NPA will rise.
3. Only PSBs can’t be blamed for the situation. The economic policy of the government and also politician-corporate nexus is behind the current state of banking industry.
4. If the NPAs keep rising in the current state like that of Kotak Mahindra or Union Bank, it will lead to shutting down of bank and it can also create a very serious economic crisis in the nation.
5. One of the main reasons of rising NPA is the relaxed lending norms especially for corporate honchos when their financial status and credit rating is not analyzed properly. Also, to face competition banks are hugely selling unsecured loans which attributes to the level of NPAs.
6. Global economy can effect the banking sector but to a very small extent. It is the policies of RBI and govt. that can improve the situation.
7. If the status of NPAs in banks is not controlled, banks can become bankrupt. The entire credit distribution structure of the economy can be destructed and the country could be in a major financial turmoil.
8. When US hit the subprime crisis, it was because of the lenient lending norms and baks had huge number of loan defaulters. The big banks filed for bankruptcy and US economy went jittery. So, NPA problem is to be taken seriously.
Steps by RBI
1.RBI suggested that lenders should carry out their independent and objective credit appraisal in all cases and must not depend on credit appraisal reports prepared by outside consultants, especially the in-house consultants of the borrower company.
2.Banks/lenders should also carry out sensitivity tests/scenario analysis, especially for infrastructure projects, which should inter alia include project delays and cost overruns. This will aid in taking a view on viability of the project at the time of deciding the Corrective Action Plan (CAP).
3.RBI also suggested that Asset Reconstruction Companies (ARCs) should be construed as a supportive system for stressed asset rather than the last resort to dispose of NPAs by banks. Sale of assets to ARCs at a stage when the assets have good chance of revival and fair amount of realizable value, for rehabilitation and reconstruction is encouraged.
4.RBI will encourage banks to use floating provisions towards accelerated provisioning/additional provisions incurred at the time of sale of NPAs as per their approved internal policy without obtaining prior permission of The promoters of the company/defaulting borrowers shall be barred from directly/indirectly buying back the asset from the ARCs. RBI proposed to look into the possible legal issues involved and address the same.