RSTV: IN DEPTH- NPAs DECLINE
In some good news for the Indian financial sector, non-performing assets reported by banks are showing a decline after rising constantly for seven years. An RBI report on the trend and progress of the banking sector shows that gross non-performing loans of banks improved to 9.1 per cent by the close of September 2019, compared to 11.2 per cent in financial year 2018. Net non-performing assets (NPAs) of all commercial banks reduced to 3.7 per cent in FY19 as against 6 per cent in FY18. Further reflecting the improvement in the health of the banking system, net NPAs nearly halved to 3.7 per cent in FY19 from 6 per cent in FY18. While cases referred for recovery through legal mechanism shot up, cleaning up of balance sheets through sale of bad loans to asset reconstruction companies decelerated annually and declined as a proportion of GNPAs in the beginning of FY19. As per the report this was largely due to the conducive policy environment and the Insolvency and Bankruptcy Code.
Decline in NPA:
- Gross NPA stable at 9.1% in September quarter.
- Net NPA of all commercial banks down to 3.7% in FY 19 from 6% in FY18.
- Gross NPA of PSBs improved to 11.6% in FY19 from 14.6% in FY18.
- Net NPAs of PSBs down to 4.8% from 8% in FY18.
- PSBs Gross NPA reduced to 5.5% from 4.7%.
- Net NPAs of private sector banks at 2% compared to 2.45 last year.
Improving health of banking sector:
- Proportion of standard assets in total advances of commercial banks increased in FY19.
- Recovery of stressed assets improved in 2019 due to IBC.
- Recovery under IBC contributed more than half of the total amount.
- Cases for recovery under various mechanisms grew 27% in volume.
- Decline of all special mention accounts, restructured standard advances, gross NPAs.
- Special mention accounts are ones with potential to become a NPA.
A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
How are NPA classified?
- Substandard assets:Assets which has remained NPA for a period less than or equal to 12 months.
- Doubtful assets:An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
- Loss assets:As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”
Impact of NPAs on Banks:
- Banks have to adhere to the provisioning norms set by RBI for the bad loans which eats into their profitability. This leads to banks having lesser capital to deploy, shareholders losing money and banks finding it tough to survive in the market
- If banks do not classify an asset as NPA, they naturally have more money to advance to earn interest income on. If large NPAs goes unreported, the bank could reach a situation, where it has advanced more money than it has available leading to a situation of technical bankcruptcy. In light of attaining the Basel norms, the burden on maintaining Capital Adequacy Ratio increases
- It also affects the competitive position of banks
- For economy, it is disadvantageous as banks become more circumspect in giving loans which affect the credit offtake in economy. India is still an economy which is largely dependent on banks to raise capital as the bond market is not that well developed. This leads to declining Gross Capital Formation affecting economic growth.
- Rising of NPAs will lead to a crisis of confidence in the market. The price of loans, i.e. the interest rates will shoot up. Shooting of interest rates will directly impact the investors who wish to take loans for setting up infrastructural, industrial projects etc.
- It will also impact the retail consumers like us, who will have to shell out a higher interest rate for a loan.
- This will hurt the overall demand in the Indian economy which will lead to lower growth rates and of course higher inflation because of the higher cost of capital.
- The trend may continue in a vicious circle and deepen the crisis.
Recovery of NPA:
- Possession/ sale of collateral.
- Restructure loans to maintain cash flow.
- Convert bad loans into equity.
- Selling of loan on discount to collection agency.
Rise of NPA in India:
- India’s bad loans fifth highest in the world.
- NPA rose drastically in India from 2015.
- RBI tightened norms for NPA recognition in 2015.
- Forced banks to identify standard assets as NPA.
- NPA originated in mid- 2000s due to economic boom.
- Corporations granted loans based on performance.
- Recession led to stagnated economic growth.
Laws relating to NPA and Bankcruptcy:
- Insolvency and Bankruptcy Code, 2016
- SARFAESI Act, 2002– The Act empowers Banks/ Financial Institutions to recover their NPAs without the intervention of the court, through acquiring and disposing secured assets without the intervention of the court in case of outstanding amounts greater than 1 lakh. SARFAESI, it is accused, has been used only against the small borrowers primarily from MSME sector.
- Recovery of Debts Due to Banks and Financial Institutions (DRT) Act: The Act provides setting up of Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs) for expeditious and exclusive disposal of suits filed by banks / FIs for recovery of their dues in NPA accounts with outstanding amount of Rs. 10 lac and above. DRTs are overburdened leading to slow disposal of cases
- Lok Adalats: Section 89 of the Civil Procedure Code provides resolution of disputes through ADR methods such as Arbitration, Conciliation, Lok Adalats and Mediation. Lok Adalat mechanism offers expeditious, in-expensive and mutually acceptable way of settlement of dispute
- Under banking regulation act 1949, RBI is empowered to monitor the asset quality of banks by inspecting record books
RBI’s guidelines to resolve NPA:
- Strategic Debt Restructuring.
- Allows banks to change management of defaulter.
- Joint lenders forum.
- Lenders evolve resolution plan.
- Lenders can vote on its implementation.
Efforts to reduce NPAs of PSBs:
- Change in credit culture with Insolvency and Bankruptcy code changing creditor- borrower.
- Control of defaulting company taken away from promoters/owners.
- Infusion of Rs 2.46 lakh crore by government.
- Mobilisation of over Rs 0.66 lakh cr by PSBs themselves..
- Fugitive Economic Offenders Act, 2018 enacted for effective action against willful defaulters fleeing Indian jurisdiction.