NPA: How they have sabotaged Indian Banking over years?
Banks run on a basic rule of lending and deposition. In a hypothetical scenarios, what is deposited with the bank by the masses forms corpus for a bank to lend it further. It is also termed as credit creation. The interest amount so collected over a loan arrangement is thus, the main source of income to the banks. Loan products are, hence, an assets to the bank which they lend forward to their customer to earn interest income. In such a scenario if a borrower fails to repay the amount on account of insolvency or absconds due to any other reason, whatsoever, and the situation prevails for a specified amount of time, then it is termed as a Non-performing Asset, i.e. NPA.
A Non-performing Asset to a bank, in layman’s language is the one where repayment of the principle amount plus interest had been overdue for considerable (specified) amount of time. These are often been termed as bad loans. An NPA is generally categorised as amount not paid within 90 days from the date it becomes due. However, this the standard time period stipulated by the banks and the actual time period may depend bank to bank and loan to loan.
Due to existence of Non-performing assets in a Bank’s Balance Sheet, there are three major effect that a bank has to face:
- Reduction in Cash Flows of the bank due to non-payment of Interest amounts.
- Provisions made for loan facilities leads to capital reductions.
- After being potentially identified as default loans, they are written off against the earnings of the bank.
As mentioned above, Credit forms the spine of a bank. Obstinate NPA’s or bad loans and diminishing rate of interest is not a healthy sign for a bank’s growth. The current subsistence of NPA’s in banking sector and their subsequent impact on the economy has been really severe. Even after the thrust given to private sector banks, the PSB’s encapsulate the major share in Indian Banking market. Notwithstanding, perpetual demands for consumer and commercial credits, NPA’s have posed challenges, where the borrower floods with questions as to reliability of information. The private sector, in that sense, have been more irrepressible and have seen fair growth in lending in consumer sector. There are numerous factors for the rise of NPA’s in India:
- Lending the priority sector, which means lending an exorbitant share of loans to politicians and bureaucrat and industrialist having a great standing in public. Unfortunately, the Kingfisher’s magnate, Vijay Mallaya has been a living example to prove this menace.
- Incorrect Decision making from the beginning as to identifying the correct sector to lend to. Credit risk may not entirely be addresses when a loan is disbursed. Therefore, it is imperative to detect and devise a plan to manage loan issues before they turn bad.
- Willful defaults, siphoning of funds, fraud, disputes, management disputes, mis-appropriation etc.,
- Bank deficiencies, for instance, credit appraisal, monitoring and follow ups, delay in settlement of payments etc.
- Ineffectiveness of recovery tribunal by banks as well government is also one of the noted cause by bad loans always remain bad loans.
- The ever changing government policies hinder the bank operation from tip to toe. For example, the fallout of handloom sector is continuing as most of the weavers Co-operative societies have become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by the Central government to renew the handloom sector has not yet been implemented, so the over dues due to the handloom sectors are becoming NPAs.
THE WAY FORWARD:
Draining a bank’s capacity to almost nil, NPA’s have proved to be menace in last two decades to Indian Banking. However, this is also a reality that there is no bank without an NPA. Therefore, the presence of bad loans in Indian Banking System cannot be ignored. Here are few remedies:
- Banks should regularly claim indemnity or security from organisations, private as well as public, to recover loan dues.
- Where borrowers face genuine difficulties, banks should introduce compromise programs form them and rather help them to come to consensus, rather than following the recovery path, which may not always be possible.
- Debt Recovery tribunals are set up by banks as well government to help banks recover the money. However, their working in today’s scenarios is highly questionable.
- Taking the legal recourse is considered the last option for any bank and should not be thought about twice, if the borrower is wilfully defaulting and absconding from paying debts.
As per the latest information, stressed assets stood at Rs. 9.64 lac crores on December 31, 2016. RBI, in December 2016, said the Gross NPA ratio of Indian Bank increased to 9.1% by September 2016 from 7.8% in March 2016. There have been many proposals at Arun Jaitely’s led finance ministry which are due to be taken by this year end The propaganda is to get an ordinance moved to deal better with NPA’s. President Pranab Mukherjee has also given his nod to NPA ordinance today (5th May 2016) aimed at empowering RBI for an effective resolution to the threat caused by NPA.