Non Performing Asset or NPA is an asset on which the installment of interest or principal, or both remain overdue for a period of 90 days or more. Or, we can say that these assets have stopped performing.
NPA is a burden, not only for a bank or financial institution but for the whole country and the economy. Therefore, every government is concerned about it. All measures are taken to keep it under control.
In India, the situation was quite bad earlier because of the nonexistence of regulations and control. Banks used to distribute huge amounts of loans without cross-checking the validity or paying capacity of borrowers.
There were no structured measures to report, audit, or complain about NPA. In recent years, there have been several measures taken to keep the NPA under control.
Recent developments on NPA
Asset Reconstruction Companies
There have been 14 new ARCs given licenses by RBI. It was done after the amendment of the SARFAESI Act 2002. These companies will unlock value from stressed loans. Earlier, it was carried out by the judiciary path, which was time-consuming and tedious.
Corporate Debt Restructuring
This step is taken to reduce the burden of the debts on the company by reducing the paid rates and by extending the time to pay the obligation back.
<Joint Lenders Forum
The creation of JLF was done to include all public sector banks that have been stressed due to NPA. The purpose of it is to avoid loans to the same person or company from multiple banks. Thus, the chances of fraud reduced.
Mission Indradhanush
This is perhaps the most significant reform effort undertaken after 1970 when the banks were nationalized.
Establishment of IBC
Insolvency and Bankruptcy Code or IBC has been pushed by the Reserve Bank Of India. This process expects to make the resolution process fast. Plus, it puts more control on the asset quality.
Credit Risk Management
When stringent processes are applied to perform the Credit Risk Management, better appraisal and accountability can be ensured. Various analysis on profit and loss account are performed. Not just that, banks are supposed to perform a sensitivity analysis on the PLA (Profit and Loss account) as well. It is done with the intention of safeguarding the banks against external forces.
These developments will help in keeping the NPA under control. It is better for the overall economic health of the country.