What is NPA or Non-Performing Asset? As per the definition of RBI, assets on which the instalment of principle, interest or both remain overdue for more than 90 days are classified as NPA.
Banks and financial services get adversely affected if the number of NPA cases goes high. Sometimes, it becomes mandatory to use legal aid services to facilitate faster recovery.
When the fundamentals are not correct, the problem becomes chronic. It destabilizes the confidence of investors and depositors.
Higher NPA forces a bank to reduce the rate of interest so that it can increase the profit margin. Once a bank goes into losses, and it doesn’t take steps to correct the problem quickly, it is almost impossible to survive.
It is the reason NPA has to be kept under control, whether you are a bank or financial institution.
Impact of NPA on industries
In the past few decades, the credit growth to the industrial sector in India was far higher than the GDP growth. It resulted in a higher proportion of the NPA in industrial sector as compared to other sectors.
Due to that, banks were reluctant to finance the industrial sector, which hampered the growth.
The credit to the MSME sector (Micro, Small, Medium Enterprise) was reduced considerably.
As other factors also hampered the growth, the overall impact was devastating. Though efforts were made to correct the situation by encouraging npa funding in india, the economy has got a setback due to a higher NPA percentage.
It is important that the banking sector remains strong if a country wants to remain economically healthy. In fact, it is a significant prerequisite.
When the NPA percentage goes high, first of all, the banking sector becomes fragile. Obviously, it is not a good sign.
In a country like India, the infrastructure sector accounted for the biggest share of NPA. Banks and financial institutions are not ready to fund it. Infrastructure projects got jeopardized without money. It caused further damage to economic stability.
Another sector that got a great hit was the food processing sector.
Since the impact is enormous, every economy should take proactive measures to reduce it.