Banks and financial institutions in India have been facing the problems of non-performing assets or NPA for a long time. Among several reasons behind this problem, irrational lending and process flaws are the prominent ones.
After 2008, banks started giving loans extensively to increase their business. However, in the endeavor of earning more profits, banks violated a few fundamental laws.
When the banks faced a big problem with NPA, there was a need felt to devise a mechanism for NPA account settlement.
Before we move further, it is important to understand the causes of NPA.
The economy has seen a slowdown in recent years. Various factors affected the earnings of corporates. Due to impacted profits, corporates were unable to repay the loans.
It is one of the prominent reasons behind higher NPA in India.
Relaxed lending norms
To increase earnings and show hefty balance sheets, banks and financial institutions followed a policy of relaxed lending norms. The financial status and credit ratings were not analyzed properly.
Banks were ready to accept higher leverage and reduced equity to promoters. Instead of analyzing the financial condition internally, banks accepted reports submitted by the promotor banks of lenders. Around half of the loans were made to companies that had an interest coverage ratio of less than one.
Banks also sold unsecured loans that resulted in NPA.
Public sector banks contributed to NPA
The major contributor to NPA were public sector banks because they gave the maximum chunk of credits to industries. NPA financial services offered loans to clients and unable to recover. The volume was quite high and it resulted in a big dent in the financial condition of banks and the economy.
Priority Sector Lending
Another important factor that resulted in higher NPA was the Priority Sector Lending or PSL. It has contributed a lot to NPA. This sector includes education, housing, MSME, and Agriculture. Around 20 percent of the NPA was contributed by them.
Credit default by promoters
Many cases of NPA were credit defaults by promoters. The process loopholes were used to divert funds to over-invoiced imports, promoto-owned subsidiaries, and exports to shell companies.
These all factors added to the overall NPA in India.
Various remedies were followed by the government to control NPA.
- A conservative approach was followed to limit the NPA. The loan disbursement and repayment tenure were stretched.
- Loan restructuring was done to ensure timely payment.
- Establishment of NPA Tribunal to resolve cases fast.