Non Performing Assets (NPA)

16th September, 2021 Economy

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Context:

The gross non-performing assets (GNPAs) of commercial banks are expected to exceed Rs. 10 lakh crore by March 2022. NPAs are expected to rise to 5-9% by March 2022.
The high GNPAs are being attributed mainly to fresh slippages in retail, micro, small and medium enterprise (MSME) accounts, besides some restructured assets.
The current asset quality stress cycle will be different from that witnessed a few years back. NPAs then came primarily from bigger, chunkier accounts.
According to the study, this time, smaller accounts, especially the MSME and retail segments, are expected to be more vulnerable than large corporates, as the latter have consolidated and deleveraged their balance sheets considerably in the past year.
Notably, however, the GNPAs of banks had declined from the peak seen in March 2018and were lower as of March 2021 vis-à-vis March 2020 on account of supportive measures, including the six-month debt moratorium, emergency credit line guarantee scheme (ECLGS) loans and restructuring measures.

An asset gets converted into nonperforming when it ceases to create income for the bank i.e., when the borrower pays neither the interest nor principal after a certain period of time.
Non-performing Asset (NPA) shall be an advance(loan) where:
- Installment and/or interest of principal remain unpaid for a period of more than 90 days in respect of a term loan.
- Installment and/or interest of principal remains unpaid for two harvest seasons but for a period not surpassing two half years in the situation of an advance granted for agricultural purposes.
- Any amount to be received remains unpaid for a period of more than ninety days in respect of other accounts.

Banks are required to categorize NPAs further into the following three categories on basis of the period for which the asset has remained as non-performing asset:
Sub standard Assets - − Assets which has remained NPAs for a period less than or equal to 12 months.
Doubtful Assets − An asset is to be categorized as doubtful assets if it has remained NPA for a period exceeding 12 months.
Loss Assets − An asset is to be classified as loss assets, where loss has been recognized by the bank or the RBI inspection or internal or external auditors, but the amount has not been written off wholly. − In another words, such asset is considered uncollectible.

The crisis of NPAs in the Indian banking system is one of the foremost and the most formidable problems that had impacted the entire banking system.

Profitability − NPAs impact profitability, banks stop to earn income on one hand and attract higher provisioning (set aside an amount in an organization's account) compared to standard assets on the other hand.
Capital Adequacy − According to the Basel norms, banks are required to maintain adequate capital on risk-weighted assets. − Every increase in the NPAs level adds to risk-weighted assets which require banks to increase their capital.
Liability Management − In the light of high non-performing assets, banks tend to lower the interest rates on deposits on one hand and likely to levy higher interest rates on advances. This may hamper economic growth.
Public confidence − The credibility of the banking system is also affected greatly due to higher level NPAs because it has impacted the confidence of the general public of the society with respect to soundness of the banking system.

Banks have to accept losses on loans (or ‘haircuts’).
They should be able to do so without any fear of harassment by the investigative agencies.
The Indian Banks’ Association has set up a six-member panel to oversee resolution plans of lead lenders. To expedite resolution, more such panels may be required.
An alternative is 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 recapitalise banks — providing such capital in multiple instalments is not helpful.