Before going into the details of NPA impacting the economy in India, let’s understand the definition of NPA or Non-Performing Asset given by the Reserve Bank of India (RBI).
As per the definition, an asset that stops to generate income for the bank is marked as Non-Performing Asset.
As far as statistics are concerned, then the public sector banks have the non-performing assets valued at more than 400,000 crores or 61.5 Billion USD.
It is almost 90 percent of the total NPA in India. The private sector banks account for the remaining 10 percent.
Why has there been such an enormous rise in NPA levels?
The global and Indian economies were booming between 2004 and 2009.
Hence, Indian firms borrowed furiously to reap growth opportunities. Hence, commercial credit was almost doubled during this period.
The investment was made in every sector-telecommunication, power, steel, and aviation. Everyone speculated 9% or more growth. Banks were lending extensively, hoping to get good returns in terms of interests.
However, the financial crisis started in the year 2008. The profits dropped, and the government banned many projects.
Due to the excessive delay in environmental permits, the infrastructural sector got the most setback. It resulted in a shortage of supply and volatility in prices of raw material.
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NPA-its impact on the Indian Economy
- The impact of NPA s huge on the economy of our country. It is the major reason behind the increase in the Current Account Deficit.
- It causes a global impact on interest rates, housing loans, personal loans, SLR, CRR, and everything. When the banking sector is stressed, lesser money is available to projects.
- Banks have to raise interest rates to maintain profit margins. Funds from good projects get diverted to bad projects.
- When investments get stuck, there is a rise in unemployment.
- Both the corporate sector and banks have stressed balance sheets and a halt in investment-led development.
- When there is an increase in the NPA, the shareholders lose confidence. They stop investing further, and the economy goes into further crisis.
- NPA increases the current account deficit, and everything gets the hit-SLR, CRR, and interest rates.
Thus, the damage is severe. It takes a lot of time for the economy to come out of the crisis. Not only the institutional borrowers, but individual borrowers, also feel insecure about it.
The negative impact is extensive.