Gross Non-Performing Assets (NPAs) of banks are expected to rise to 8-9% this fiscal from 7.5% as on March 31, 2021 but they would still remain below the peak of 11.2% seen at the end of fiscal 2018.

What are Non-Performing Assets?

• For a bank, the loans given by the bank is considered as its assets.
• Any asset which stops giving returns to its investors for a specified period of time is known as Non-Performing Asset (NPA).
• So, if the principle or the interest or both the components of a loan is not being serviced to the lender (bank), then it would be considered as NPA.

Classification of NPAs in India

• According to the RBI, a NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
• Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.

1. Substandard Assets: Assets which has remained NPA for a period less than or equal to 12 months.
2. Doubtful Assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
3. Loss Assets: As per RBI, loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.

NPAs of Agriculture Loans

In terms of Agriculture/Farm Loans, the NPA is defined as under:

• For short duration crop such as paddy, Jowar, Bajra etc. if the loan (instalment/interest) is not paid for 2 crop seasons, it would be termed as an NPA.
• For Long Duration Crops, the above would be 1 Crop season from the due date

Reasons for NPAs in India

Impact of NPA on Economy

• Depositors’ loss: Depositors do not get rightful returns and many times may lose uninsured deposits.
• High interest on lending: Banks may begin charging higher interest rates on some products to compensate NPA loan losses.
• Trust issues: Bad loans imply redirecting of funds from good projects to bad ones. Hence, the economy suffers due to loss of good projects and failure of bad investments

Steps taken to curb NPA

(A) By the Govt

• Mission Indradhanush:to make the working of public sector bank more transparent and professional in order to curb the menace of NPA in future.
• Insolvency and Bankruptcy Code: To make it easier for banks to recover the loans from the debtors.
• Stringent NPA recovery rules: The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act or SARFESI Act of 2002 was amended in 2016.

(B) By RBI

RBI introduced number of measures in last few years which include:

• Corporate Debt Restructuring (CDR) mechanism,
• Setting up a Joint Lenders’ Forum, providing banks to disclose the real picture of bad loans, asking them to increase provisioning for stressed assets,

Other terms related to NPAs

Write-off effect

• A loan write-off is a tool used by banks to clean up their balance-sheets.
• If a loan turns bad on the account of the repayment defaults for at least three consecutive quarters, the exposure (loan) can be written off.
• A loan write-off sets free the money parked by the banks for the provisioning of any loan.

Twin Balance Sheet

• It deals with two balance sheet problems. One with Indian companies and the other with Indian Banks.
• Debt accumulation on companies is very high and thus they are unable to pay interest payments on loans.

Four Balance Sheet Challenge

• In his paper named ‘India’s Great Slowdown’, Arvind Subramanian (former Chief Economic Advisor) mentions the new ‘Four balance sheet challenge’.
• It includes the original two sectors – infrastructure companies and banks, plus NBFCs and real estate companies.

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