Q) To ensure the revival of the Indian economy, solving the NPA crisis is a must. Comment.
Why this Question
Important part of GS paper III.
Key Demand of the Question:
Causes and implications of the NPA crisis and measures to deal with it.
Comment- Pick out the main points on a subject and give your opinion, reinforcing your point of view using logic and reference to relevant evidence, including any wider reading you have done.
Give a brief overview about the NPA crisis in India.
In the first part, highlight the causes and the impact of rising NPAs.
In the next part, highlight the measures needed to overcome the crisis.
Conclude with a way forward.
A non-performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a specified period of time. India, loans of worth more than ₹10.3 trillions have been classified as non performing assets, which roughly amounts to 11% of all the loans given. Moreover, adding restructured and unrecognized assets, the total stress would be 15-20% of total loans. This is mostly the problem with the Indian Public Sector Banks (PSBs) which account for 86 percent of the NPAs.
What led to the Rise in NPAs
- During the mid 2000s when the Indian economy was at a boom and the businesses were tremendously growing, large corporations were granted loans based on extrapolation of their recent growth and performance. Due to this, most financing was through external borrowings rather than internal promoter equity. But as economic growth stagnated following the global financial crisis of 2008, the repayment capability of these corporations decreased leading to NPAs
- Wait and watch approach by Banks- Banks allow deteriorating assets class to go from bad to worse in the hope of a revival and often offer restructuring options to corporate.
The government and the RBI have taken several measures to combat the rising NPAs in India. Such measures include:
- IBC- the creditors of these insolvent accounts, presided over by an insolvency professional, decide whether to restructure the loan, or to sell the defaulter’s assets to recover the outstanding amount. If a timely decision is not arrived at, the defaulter’s assets are liquidated.
- Strategic Debt Restructuring - allowed banks to change the management of the defaulting company.
- Joint Lenders’ Forum – where all the lenders evolved a resolution plan for an NPA and voted on its implementation.
- Project Sashakt - RBI made it mandatory for lenders to enter into an Intercreditor Agreement (ICA) during the review of the borrower account within 30 days from date of first default to any lender. ICA allows banks to decide resolution strategies outside the IBC and it will help lenders to accelerate processes to resolve stressed assets.
- The government needs to amend the laws and give more powers to banks to recover NPAs.
- A thorough assessment before giving the loans by checking across all the lenders to ensure judicious lending.
- Major decisions are made by the Credit Sanction Committee consisting of senior-level executives. Hence it’s important to make senior executives accountable.
- Effective Management Information System (MIS) needs to be implemented to monitor early warning signals about the projects. The MIS should ideally detect issues and set off timely alerts to management so that necessary action is taken.
The rising NPAs has been a major deterrent in the growth of the Indian economy as it limits the lending capabilities of the banking sector reducing the credit flow in the economy. Though it is a challenging and cumbersome task to solve this problem, it will be beneficial in the longer run to ensure the health of the Indian banking sector as well as the economy at large