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What is NPA?

  1. The assets of the banks which don’t perform (that is – don’t bring any return) are called Non-Performing Assets (NPA) or bad loans.
  2. Bank’s assets are the loans and advances given to customers.
  3. If customers don’t pay either interest or part of principal or both, the loan turns into bad loan.
  4. According to RBI, terms loans on which interest or instalment of principal remain overdue for a period of more than 90 days from the end of a quarter is called a Non-performing Asset.
  5. However, in terms of Agriculture / Farm Loans; the NPA is defined as
    • For Short duration crop agriculture loans such as paddy, Jowar, Bajra etc. if the loan (instalment / interest) is not paid for 2 crop seasons.
    • For Long Duration Crops, the above would be 1 Crop season from the due date.

Reasons for the rise in NPA in recent years

  1. GDP growth slowdown
  2. Relaxed lending
  3. Priority Sector Lending, as per the latest estimates by the SBI, education loans constitute 20% of its NPAs.
  4. The Lack of Bankruptcy code in India and sluggish legal system make it difficult for banks to recover these loans.
  5. Banks did not conduct adequate contingency planning, especially for mitigating project risk.
  6. Restructuring of loan facility was extended to companies that were facing larger problems of over-leverage& inadequate profitability.
  7. Companies with dwindling debt repayment capacity were raising more & more debt from the system.

How to curb the menace of Public Sector Banks (PSB)?

  1. Review of NPA’S/Restructured advances
  2. Bankruptcy code.
  3. Asset Reconstruction Company (ARC) with equity contribution from the government and the Reserve Bank of India (RBI).
  4. Improving credit risk management
  5. Banks should conduct necessary sensitivity analysis and contingency planning while appraising the projects and it should built adequate safeguards against such external factors.
  6. Strengthen credit monitoring
  7. Enforce accountability
  8. Address corporate governance issues in PSB.

Why bank health is important?

  1. Low revenue for banks
  2. Low resources with bank
  3. Scarcity of funds in the Indian security markets.
  4. The price of loans, i.e. the interest rates will shoot up
  5. Low industrial growth
  6. Low Savings
  7. Lower GDP growth rates
  8. Higher Inflation

Steps taken by RBI and Government to curb NPA

  1. Mission Indradhanush.
  2. Bankruptcy code.
  3. Corporate Debt Restructuring (CDR) mechanism,
  4. Joint Lenders’ Forum, prodding banks to disclose the real picture of bad loans, asking them to increase provisioning for stressed assets,
  5. 5:25 scheme where loans are to be amortized over 25 years with refinancing option after every 5 years and empowering them to take majority control in defaulting companies under the Strategic Debt Restructuring (SDR) scheme.