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Insider's View: NPA Solutions Unveiled

Posted Date: 15-09-2023 Posted By: user

Insider's View: NPA Solutions Unveiled

India's banking sector has seen a big boom after globalization, but there was a downside to it as well. Due to an extraordinary focus on grabbing business, banks and financial institutions were giving loans freely to customers. In the process, there was a dilution of rules sometimes.

It resulted in the problem of Non-Performing Assets, popularly known as NPA. It affected the overall health of not only financial institutions but the economy as well.    

Statistics say that in 2018, the problem of NPA in commercial banks and public sector banks contributed to around 20 Trillian Indian rupees. In the case of Public sector banks, the ratio of gross NPA to advances was around 15 percent. Such high levels resulted in a banking crisis.

There were no problems till 2016-17, but after that, many things began to go wrong.

As a result, financing costs rose because India started tightening policy rates.

Further, the depreciation of the rupee resulted in higher outflows for companies that had borrowed in foreign currency.

This fatal combination of adverse factors made it difficult for companies to service, which means to maintain and repay their loans to Indian banks.

The years 2014 to 2016

The year 2014-15 marked a watershed because banks made their norms extremely stringent. In fact, they were guided by the Reserve Bank Of India, which  believed that the Non-Performing Assets, were being understated.

However, NPAs in 2015-16 almost doubled over the previous year as a result. It is not because of the regulations, but it was due to cumulative bad decisions of the past that were now coming to be captured in a more accurate manner.

The meaning of higher NPAs was simple- it means higher provisions on the part of banks. A provision is an amount that you put aside in your accounts to cover a liability that might arise in the future.

The purpose of a provision is to make a current year's balance more accurate. It is because there may be costs that could be accounted for in either the current or previous financial year, to some extent.

Banks started making losses because of the provisions, especially, the Public Sector Banks. As a result, their capital was eroded. It impacted the growth of the banks. Without adequate capital, bank credit cannot grow.

The solution

Since the problem is more concentrated in public sector banks, people blamed their public ownership. However, the real problem was incompetence in appraising the risk poorly and corruption. These things affected even cooperative sector banks or private banks as well.

In fact, some of the PSBs were in a better condition than private banks as far as Non-Performing Assets were concerned.

To resolve the issue of Non-Performing Assets, a  broad set of actions was required. Some immediate and others over the medium term and aimed at preventing the recurrence of such crises.

  • Banks have to accept losses on loans, popularly called  ‘haircuts’. They should be able to do so without any fear of harassment by the investigative agencies.
  • A panel of high-level comprising six members was set up to oversee the resolution plans of lead lenders. Even more panels were formulated as and when needed.
  • An alternative is to set up a Loan Resolution Authority, if it is required, it has to be done through an Act of Parliament.
  • The government has to infuse at one go whatever additional capital is needed to recapitalize banks. It has to be a one-time action,  offering such capital in multiple installments may not be very much helpful.

The solutions and a keen observation of NPA have helped greatly in the past few years. India has overcome the problem to a great extent.