When the economy of a country is going through a boom period, everything is considered fair. People don’t want to look into the aspects that may become a problem in the long run.
Loans were available on-demand, and there was not much attention towards the recovery of it. It caused poor recycling of funds and a deleterious effect on the deployment of credit.
Due to the lack of stringent processes and loopholes in the system, the non-recovery of loans became a major issue. Bad loan or npa in india affects not only the availability of credit but also the financial soundness of a bank or lender.
clt Mumbai to adhere to the service rules related to the appreciation of procedural law or evidence.
Role of NPA in the Indian economy
The detrimental impact of NPA is on the profitability of banks. On one hand, banks stop earning, and on the other hand, they also attract higher provisioning as compared to standard assets.
Statistics say that banks provide around 25 to 30 percent additional provision on incremental npa account settlement, which has a direct impact on the profitability.
NPA impacts the economy in many other ways.
NPA increases pressure on the recycling of funds. It reduces the lending ability of a bank. It contracts the money stock.
A bank is forced to lower the interest rate on deposits and levy higher interest on advances.
It causes a major setback to the business of banks.
A bank has to maintain adequate capital on its assets, which are risk weighted. It has to be done on an on-going basis.
When NPA increases, it adds to risk-weighted assets.
Lack of confidence of shareholders
Increased NPA harms the bank business and profitability. Banks do not earn profits, and they are forced to curtail the dividends.
It reduces the confidence of the customers.
Thus, npa management is necessary to reduce the impact on the Indian economy.