GROSS NON-PERFORMING ASSETS

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The Gross non-performing assets (GNPAs) of Indian banks are expected to decline to 5% this fiscal year, and to 4% by March 31, 2024, as the economy is showing a strong post-pandemic economic recovery and higher credit growth, according to a study released by Crisil Ratings.
The asset grade of the Indian banking sector also benefits from the sale of Non-Performing Assets (NPAs) to the National Asset Reconstruction Company Ltd. (NARCL).
The study also raised concern about the highly unequal recovery in various sectors.
- Maximum improvement was seen in the corporate sector, where gross NPAs may decline to 2% in the next fiscal year from 16% NPAs in March 2018.
- However, Gross NPAs in the MSME sector may increase to 10-11% by March 2024 from 9.3% in March 2022.

Non-Performing Assets (NPAs)

A non-performing asset (NPA) is a classification used by financial institutions for loans/credits/advances on which the principal is due and no interest payments have been paid for a period.
- In easier words, if the clients do not repay the principal amount and interest for a certain period, then such loans are classified as Non-Performing Assets (NPAs).
An account will be classified as NPA if the interest payment remains overdue for more than 90 days.
- In the banking sector, accounts are classified as NPAs on the day the account becomes overdue for more than 90 days.
- However, in many Non-Banking Financial companies (NBFC), this classification is made after the end of 90 or 180 days.

Types of NPAs

Standard Assets: It is a kind of performing asset on which principal and interest are due for anywhere from 90 days to 12 months. These assets carry a normal risk and are not NPA in the real sense.
- Therefore, no special provisions are required for standard assets.
Sub-Standard Assets: Loans and advances which are non-performing assets for a period of 12 months, fall under the category of Sub-Standard Assets.
Doubtful Assets: Assets are classified as doubtful when principal and interest for a period of more than 12 months are known as Doubtful Assets.
Loss Assets: All those assets which cannot be recovered by the lending institutions are known as Loss Assets.

Concern

The problem of NPAs in the Indian banking system had impacted the Indian Economy and negatively affected its Growth potential.
It reduced the profitability and credit growth of the banks.
According to the Basel norms, banks are required to maintain a Capital Adequacy Ratio of 8%.
- Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital in relation to its risk-weighted assets and current liabilities. CAR is decided by central banks and bank regulators of a country.
- In India, as per RBI guidelines, Indian banks are required to maintain a CAR of 9% while Indian public sector banks have to maintain a CAR of 12%.
- Every increase in the NPAs level adds to risk-weighted assets which require banks to increase their capital under Capital Adequacy Ratio.
To maintain profitability, banks decrease the interest rates on deposits and charge high-interest rates on loans/credit/advances. This negatively affects economic growth.
The credibility of the Indian banking system might decline due to higher NPAs levels because it directly affects the public trust.

Steps to Manage NPAs

Asset Reconstruction Company (ARC)
- Asset reconstruction companies (ARCs) are specialized financial institutions that buy NPAs from banks and financial institutions and aid them in cleaning up their balance sheets.
- They function under the regulatory supervision of the Reserve Bank of India.
- ARCs save the time and effort of banks in going after defaulters and thus allow them to focus on normal banking activities.
Bad Bank
- A bad bank is a corporate structure that isolates high-risk assets or non-performing loans held by a bank or a financial organization.
- Bad Bank aimed at easing the stressed assets burden of banks and allowing them to lend more actively.
- It generally does not have a primary purpose of generating profits. It will mainly focus on resolving and restructuring accounts.
- It works by demarcating assets into good assets (that are repaid within time) and toxic or bad assets (defaulted loans).
- Such toxic assets are meant to be transferred from the books of banks to bad banks at a price below their book value, for the sole purpose of recovery of risky assets.
National Asset Reconstruction Company Ltd
- It is India’s first-ever Bad Bank, which was set up in 2021, and RBI has recently granted permission under the SARFAESI Act 2002.
- If the bad bank is unable to sell the bad loan or has to sell it at a loss, then the government guarantee will be invoked.
- To manage assets with the help of market professionals and turnaround experts, the Government will also set up India Debt Resolution Company Ltd. (IDRCL) along with NARCL.
- The IDRCL is a service company or an operational entity wherein public sector banks (PSBs) and PFIs will hold a maximum of 49% stake and the rest will be with private-sector lenders. When the assets are sold, with the help of IDRCL, the commercial banks will be paid back the rest.

Way Forward

There must be a sunset clause in the resolution process. It is necessary to develop time-bound strategies for the resolution of assets, or else the bad bank will be reduced to a mere parking space for bad loans.
- Bad Banks should have a suitable mechanism in place that can facilitate funding for maintaining the quality of assets till their resolution.
Banks have to accept losses on loans (or ‘haircuts’). They must do voluntarily; without any fear of harassment by investigative agencies.
Recently The Indian Banks’ Association has set up a six-member panel to oversee the resolution plans of lead lenders. To expedite resolution, more such panels are required.
There is an urgent need to set up a Loan Resolution Authority, if necessary through an Act of Parliament. Also, the government must infuse at one go whatever additional capital is needed to recapitalize banks — providing such capital in multiple instalments is not helpful.
Concerns and loopholes raised over bad banks (NARCL) must be readdressed to promote transparency and accountability in the mechanism and to ensure its independence.
Global experiences show that the recovery process for NPSs must be made flexible as per the needs of the business and economic sectors.