Several financial institutions have garnered media attention in the past few years due to their NPAs. But have you ever wondered what they are specifically? In this article, you’ll get a complete overview of NPAs and the way they influence the overall Indian economy. Let's get started by understanding NPAs and their effects on the economy so the next time you hear NPAs, you’ll have your facts in place!
Introduction To NPAs
Public deposits with banks are viewed as liabilities, whereas loans and advances made by banks to their clients are viewed as assets. The Reserve Bank of India (RBI) defines non-performing assets (NPAs) as assets that have not had their interest or principal payments made for 90 days or longer. These assets essentially no longer function and are known as NPAs.
Non-performing assets (NPAs) must be divided into three categories by banks and financial institutions: substandard assets, dubious assets, and loss assets. Assets that have been labeled as non-performing for less than 12 months, uncertain for 12 months, or loss for 12 months are considered substandard. Even though loss assets may have some value, the Reserve Institute of India (RBI) deems them to be uncollectible and of such low value that they cannot be kept as bankable assets.
What Led To The Growth Of NPAs In Recent Years?
1. Bad Loans
Because there wasn't a good bankruptcy law in place, businesses struggled to get out of debt, which led to the accumulation of many bad loans. Companies had to go through the legal process, which was time-consuming and problematic for banks and financial institutions.
2. Political Pressure
Key economic decisions were delayed as a result of the previous administration's policy paralysis on Public-Private Partnerships (PPPs). This had a detrimental effect on macroeconomic stability and company performance. Additionally, it can be attributed to the pervasiveness of crony capitalism, in which banks are compelled to lend money to particular industries that are frequently experiencing financial difficulties because of political pressure.
3. Economic Reasons
Bad loans have increased due to the economic slump since 2008, with global demand remaining low and all industries' exports displaying a declining trend. When it comes to steel, the reduction in global pricing means more loans will need to be repaid in the coming months. While in the electrical sector, the weak financial standing of the majority of state-owned banks is the problem.
A contributing factor to the surge in subprime loans, according to the Economic Survey 2015, was corporate overleveraging. Another problem is the lack of knowledge of lending principles among loan officers, made worse by frequent job rotation and banks' coercive loan recovery methods.
Effects Of NPAs On The Indian Economy
1. Growing Current Account Deficits
One of the primary causes of this is an increase in the current account deficits. A rise in current account deficits directly affects interest rates, the cash reserve ratio, and the statutory liquidity ratio.
2. Stress In The Nation’s Financial Institutions
There is low availability of money to fund other initiatives due to the financial sector's stress, which has a detrimental impact on the economy as a whole. Banks are increasing interest rates in order to maintain their profit margin. This in turn means that they are diverting funds away from successful endeavors and investing them in unsuccessful ones.
3. Negative Effect On Public Sector Banks
The issue with public sector banks is that they don't provide their shareholders with a good rate of return. As a result, it reduces the amount of dividend income the banks provide to the Indian government. This can make it more difficult for the government to fund infrastructure and social programs and may have social and political repercussions.
How To Deal With NPAs
Immediate corrective action is necessary in order to efficiently deal with Non-Performing Arrangements (NPAs). This course of action ought to involve the application of technology and data analytics for identifying prior warning signals, finding hidden NPAs, enhancing internal credit assessment capabilities, and forensic audits to learn more about the intents of the borrower.
Several leading financial institutions are taking the measure to tackle the problem of NPAs. One such company that aims to maintain a net NPA below one is Poonawalla Fincorp. According to Abhay Bhutada MD, taking this measure would help enhance the company’s asset quality.
Conclusion
There is no doubt that the problem of non-performing assets (NPAs) needs to be addressed given the size of the banking industry. Considering the current circumstance, it's obvious that the problem is not one-sided. It has to do with economic recession, the challenging business climate in India, issues with the legal system, and the inefficiency of the banks' operations. The suggestions made by the RBI are a significant start in the right direction.
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