NPA CRISIS; MANAGING BAD LOANS

KARTIK UPADHYAY






To develop our nation, we must focus on our economy; it involves strengthening our financial stability. One of the measures to create economic strength is to lower the NPA. NPA is an inevitable burden on the Banking industry.






India ranks number second globally with a population of over 1.3 billion, which is equivalent to 17.7% of the total world population. 34 Banks (Public and Private) serve this massive consumer base across the Country.




The Banking industry is an industry that is the backbone of the Country's economy. It is the most dominant segment of the financial sector.






Without a highly effective Banking system, our Country, India, can not have a healthy economy.

To understand the above situation, we have to reflect on the concept of NPA.

What Is an NPA?

How does it affect the financial stability of the Country?

Does increment of NPA will lead to a financial crisis?



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NPA: Non- Performing Assets

An asset, a leased asset, is non­-performing when it ceases to generate income for the Bank."

A 'non-performing asset' (NPA) is defined as a credit facility in respect of which the interest and instalment of principal have remained 'past due' for a specified period. When Bank offers a loan, it charges interest on the amount, so it is a standard asset. If a borrower stops paying the interest, or the principal, or both, the lender loses money and income to the Bank is stopped. The loan disbursed then is classified as a non-performing asset (NPA). Indian Banks are seriously affected by the NPA crisis with the rising number of defaulters. A loan is considered to be NPA when the interest is not paid for 90 days continuously. The period of default may vary based on the terms and conditions agreed upon by the Bank and the borrower.



According to the RBI (Reserve Bank of India), NPA rates for the fiscal year 2020 marked as 6.8 trillion rupees of the public sector banks. In the same fiscal year 2020, it is marked as 2.1 trillion rupees of private sector banks. It is the first time that the gross NPA reached its highest rates in our country.

NPAs In Public & Private Sector

NPA is considered to be one of the important indicators for the health of the Banking industry. It has a direct impact on the profitability, liquidity and solvency position of the Bank. If the NPA rates of a Bank is higher, then it indicates the in-efficiency of the Bank, for example, higher rates result in low funding and if the NPA rates of the bank are lower then it shows a healthy financial condition of the Bank. Lower rates of NPA also facilitates more funds. In simple language, it increases creditworthiness. 

The availability of funds gets higher, which indicates more disbursement of loans and more business for the Bank. That results in a healthy condition of the bank. India’s total defaulted loan is a kind of worry for the banks. For example, As prescribed by the RBI that at the end of September 2020 total gross NPAs of the banking industry were at 7.5% and they have also assumed that it is expected to rise to 13.5% till September 2021. Yes, In 2021 the percentage of total gross NPAs would be just doubled approx.



By highlighting the above statements, the main focus of all the Bank's would be to keep their NPA's at a lower rate, either it is private or a public sector Bank.





Less NPAs give a provision for more fundings being disbursed, and more fundings results in more reserves and more reserves make the Banks and, in turn, the Country financially stable.




Loans of the bank can be sorted into four categories based on the period they remained a non-performer.

a.) Standard Assets

b.) Sub-Standard Assets

c.) DoubtfuL assets

d.) Loss Assets

a. STANDARD ASSETS - As prescribed by the RBI (RESERVE BANK OF INDIA), standard assets are those in which all amounts of the loan including principal amount and the interest is received on time at the maturity period by the Bank.

b. SUB-STANDARD ASSETS – A Sub-standard asset would be the one that has remained as a non-performer for less than 12 months. Sub-standard assets have credit weaknesses that jeopardise the liquidation of the debt. There is also a possibility of incurring and sustaining some losses if the deficiencies are not corrected.

c. DOUBTFUL ASSETS - An asset is Doubtful if it remains a sub-standard asset for at least 12 months. A doubtful asset has all the characteristics of a sub-standard asset also.

d. LOSS ASSETS - A loss asset is one where loss has been identified by the Bank's internal auditors and RBI's auditors, and the asset has not been written off. These assets are also considered uncollectible and have little value to the bank.

OVER-DRAFT

Banks provide the facility of an overdraft, which, when jumped, also falls in the category of NPA.

The overdraft facility is provided in a current account, in which you can withdraw more money than the balance of your account. If any company has taken an overdraft and not paid back the overdraft amount within 90 days, then that overdraft becomes an NPA for the Bank.

As and when the case of default arises, the Bank tries different approaches to get the loan amount back from the company/ individual in the following way(s)-

a) If the borrower has put any assets as collateral for the loan, then the company has the right to sell those collateral assets to get the loan amount back.

b) If the loanee has kept its shares pledged with the Bank, then the Bank has the right to sell its shares to get back the principal amount of the loan.

c) If any company is not paying back the loan, then the Bank may approach the NCLT (National Company Law Tribunal) to liquidate the company. This is considered as the last option for the Bank through which they can recover the defaulted loan.

d) They can also approach IBC (Insolvency and Bankruptcy Code) to recover the defaulted loan. For example- In the financial year 2019-20, IBC has recovered 61 per cent of the total defaulted loans of the bank through various channels.

e) If the loan is not paid on collateral like an unsecured loan (loans having less security), it is considered NPA for the Bank.




IMPORTANT FACTS AND FIGURES OF NPA



As we are observing the situation about NPAs, which is a serious cause to maintain our economy. Let us highlight the data of the past 6 years of NPAs of Public sector and Private sector banks.

PUBLIC SECTOR BANKS (PSBs)

The pie chart of NPAs for PSBs for the past 6 is given below.

PRIVATE SECTOR BANKS (Pvt. Banks)

The pie chart of NPAs for Pvt. Banks for the past 6 years is given below!

GRAPH OF PUBLIC SECTOR BANK

As we are seeing in the graph, The past performance of NPAs in the last 6 years. We are observing that the rates of public sector banks are rising. But after 2018 it is slightly diminishing. The reason behind it would be the strategies and plans of the government.








SCATTER DIAGRAM OF PRIVATE SECTOR BANKS





In the given figure, it is observed that the rates are increasing with the increasing rates of NPAs. So, the scatter diagram is moving upward and in the period from 2018 to 2019, It has slightly curved but then it got a hike in 2020 and as I mentioned above in my blog that it’s the first time in history that NPA rates of private sector banks have touched the staggering amount of Rs. 2.11 lakh crores in FY 2020.

Conclusion :

The loans falling into the category of NPAs can be attributed to the following :

Internal Factors :

· Improper selection of borrower's activities,

· Weak credit appraisal system

· The industrial problem, slackness in credit management and monitoring, Lack of follow up by Bank, natural calamities and other uncertainties

· Diversion of fund for expansion, diversification, modernization or for taking up new projects

· Time or cost overrun during the project implementation stage, business failure due to product failure, failure in marketing

· Inefficiency in bank management, slackness in credit management and monitoring.

The external factors include

· Recession or power shortage,

· Price escalation, exchange rate fluctuations,

· Change in government policies.

· Liberalization of the economy.

· Crashing of capital market



· Using the granted loan of short term for long term transactions.

Banks aim to reduce NPA because as high NPA causes a lack of financial stability in the Country,
"HIGHER NPA INDICATES INEFFICIENCY OF THE BANKS AND LOWER NPA INDICATES BETTER PERFORMANCE AND MANAGEMENT OF FUNDS".



IT CAN MAINTAIN OUR ECONOMY BETTER WITH LOW RATES OF NPAs!



I WILL BE GLAD IF YOU COULD PROVIDE YOUR VALUABLE SUGGESTIONS/COMMENTS ON THE ABOVE LITERATURE.

NOTE- All images are taken from various sources with the help of the Internet. All values which are taken for the graph and pie charts are estimated values taken from the Financial Study Reports of RBI (RESERVE BANK OF INDIA)/ FINANCIAL INSTITUTIONS of the past 6 years.