Introduction
Non-performing assets (NPAs) are categorised as the loans that are in risk of default. A loan is considered as a non-performing asset once the borrower fails to make interest or principal payments for 90 days.
In general terms, NPAs are assets/projects that are unable to generate cash flow in the period and to the extent originally expected. By translation alone, banks may not be able to timely recover the entire amount lent and hence, set aside certain amount for a known liability in future. However, in reality, the factors causing rise in NPAs are wrong assumptions/inefficiencies, genuine reasons and violation of law.
The Magnitude of NPAs
A recent survey found out that in the banking system net NPAs constitute only 2.36 per cent of the total loans. However, on taking into account the restructured assets also, 10.9 per cent of the total loans in the system will be stressed assets account. According to a report released by the International Monetary Fund (IMF), the debt at risk in India constitute around 37 per cent of the total debt.
State Bank of India (SBI), the largest lender in India, reported that in the third quarter of the 2015–2016 financial year, a massive 67 per cent decrease took place in consolidated net profit at ₹1,25,949 crore and loans worth ₹20,692 crore were termed as bad loans.
The cumulative gross NPAs of 24 listed public sector banks that includes the market leader SBI and its associates as on 31 December 2015 was found to be ₹3,93,035 crore as per an estimate.
The Economic Survey 2015–2016 also raised apprehensions over the possibility of growing bad debts hampering the future growth prospects of the banks.
Causes of Rising NPAs
In reality, factors that cause rise in NPAs are wrong assumptions/inefficiencies, genuine reasons and violation of law. These could be classified as external and internal environment.
The causes in the external environment category are global slowdown, drop in domestic demand, setback in policy and disputed contracts.
The factors causing NPA rise under the internal environment category are as follows:
• Banking sector: Poor credit appraisal; weak risk management; governance deficit, all debt-no equity; chasing quick growth; power-faulty FSAs, infra financing particularly highways—‘gold plated’ contracts; pass through arrangement, termination payments; pretend and extend.
• Beyond corporate universe: Small/medium enterprises—lack of timely support and delayed payments; Kisan Credit Card and agriculture distress vis-a-vis crop insurance.
• Corporate India: High leverage; complex web-holding company; overseas acquisitions; step down entities; unhedged exposures; siphoning, diversion and so on.
• Value sale versus distress sale: Minsky’s Financial Instability Hypothesis—three types of borrowers (Hedge, Speculative and Ponzi).
Effects of Rising NPAs
• A major chunk of NPA is formed by the public sector banks, which provide around 80 per cent of the credit to various industries. Last year, SBI provided a huge amount of loan to Kingfisher, which was marred in financial crisis, but it is unable to recover from it.
• The falling of any Indian industry into crisis is bound to impact the banking sector causing their NPA to rise.
• Not only PSBs but the economic policy of the government and the politiciancorporate nexus are behind the rise in NPAs of banking industry.
• The consistent rise of NPAs in the present scenario as in case of Kotak Mahindra or Union Bank will lead to closing of bank, thus, creating a serious economic crisis in the nation
• One of the critical factors behind the rising NPA is relaxed lending norms, especially for corporate chiefs. Often, a proper analysis of their financial status and credit rating is not carried out. Moreover, in the face of competition, banks are resorting to hugely selling unsecured loans that causes a rise in the level of NPAs.
• Global economy can cause a very minor impact on banking sector. The policies of RBI and government can, however, improve the situation.
• There is a need to keep the NPAs in check otherwise a bank may go bankrupt. This would result in the dismantling of entire credit distribution structure of the economy causing a major financial turmoil in the country.
• When the financial crisis hit the United States, it was because of the lenient lending norms and due to huge number of loan defaulters in banks. The US economy went into panic when big banks filed for bankruptcy. Thus, NPA problem should be seriously taken.
Steps Taken by the RBI
• RBI has recommended the lenders to carry out their independent and impartial credit appraisal in all cases without relying on credit appraisal reports put up by outside consultants, in particular, the in-house consultants of the borrower company.
• Banks/lenders should perform sensitivity tests/scenario analysis, specifically for infrastructure projects, including project delays and cost overruns. This will aid in decision-making on vitality of the project at the time of deciding the Corrective Action Plan (CAP).
• RBI further recommended that Asset Reconstruction Companies (ARCs) should be interpreted as a supportive system for stressed asset, instead of considering it as a last resort to dispose of NPAs by banks. It is recommended to sell the assets to ARCs at only that stage when there are good chances of revival of the assets and obtaining fair amount of realisable value, for rehabilitation and reconstruction is encouraged.
• Banks will be encouraged to use floating provisions, without obtaining prior permission of the promoters of the company, as per their approved internal policy towards accelerated provisioning/additional provisions aroused at the time of sale of NPAs. Defaulting borrowers shall be barred from repurchasing the asset directly/indirectly from the ARCs. RBI suggested to examine and address the potential legal issues involved.
RBI’s Action Plan for Early Identification and Resolution of Bad Loan Cases
• Borrowers with suspicious credit worthiness should be offered expensive loans.
• Debt restructuring plan should be set up within 17–100 days instead of the 180- day time limit followed earlier.
• Action should be taken over payment delay of 30–60 days instead of earlier prescribed limit of 90 days.
• Setting up a joint lenders forum for borrowings of ₹100 crore and more.
• Special branches to be set up for speedy disposal of SARFESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act) cases.