Non Performing Assets (NPAs) of commercial banks in India are on increase in the last few years. The issue of NPAs has not remained restricted alone to the banking industry or economic sector of India but is also affecting the common man’s life directly or indirectly. The issue of NPAs is not only bothering us in terms of change of bank interest rates for various types of loans but its knowledge has also become essential for everybody of us to crack various types of competitive examinations or interviews in corporate sector or Group Discussions. This article tries to focus on basic understanding of concept of NPAs and the latest status of NPAs in Indian economy.

The banks act as the financial intermediaries – linking the cash starved and cash surplus individuals or institutes – in any economy. For any bank, the loans given by them are their assets and the bank earns the profit through the way of lending. The regular payment of EMI (Equated Monthly Instalments) by its borrower allows the recovery of the principal and the interest on the same by the bank.

Usually, the health as well as the financial condition of a bank is measured in terms of its proportion of bad assets or Non Performing Assets with the bank. Simply, NPAs indicate the amount of loan that was not returned back by the customer. An asset becomes non-performing when it ceases to generate income for the bank.  A loan whose interest and instalment of the principal amount, have remained ‘overdue’ for a period of 90 days or more is considered as NPA. Overdue is a situation where the loan is not paid by the due date fixed by the bank. Assets of a bank are classified in terms of its repayment status as – Standard assets, Sub-standard assets, Doubtful assets and Loss assets, respectively.

There are various reasons why NPAs are growing exponentially in Indian economy which include some corporate as well as other reasons too. In all, the total NPAs in Indian banks including both the public and private sector banks were Rs 6,97,409 cr in December 2016. The NPAs has been built up in Indian economy over a period of time and is the end result of number of factors related to the banking sector. The reasons for built up of NPAs in Indian economy extend from faulty lending policies of banks, restructuring of certain corporate loans, Priority Sector Lending pattern mandated by the Government of India to the impact of recession in global economy on India.

Increasing levels of NPAs in Indian economy has lead to its serious consequences on the economy. It has lead to the scarcity of funds in Indian security market leading to lesser availability of capital to the corporate sector. The banks have also become sceptical about the capability of repayment of loans by the industries. The higher rates of NPAs in Indian banking sector has got negative impact on interest rates. It has lead to a hike of interest rates on the loans, due to the lack of confidence in the banking sector which in turn, affects the investors who are willing to take loans for their projects. The common man of India also faces difficulties in repaying a higher rate of interest for their loans. The NPAs also lead to a situation of a higher cost of capital, higher inflation and hence the lower growth rate of economy.

Government of India had taken various steps in tackling the issue of NPAs from time to time. Debt Recovery Tribunal (DRT) was set up in year 1993 to recover the debts of banks from the borrowers. However, the delay in processing of cases by DRTs and certain inherent loopholes in the system lead to the situation of increasing NPAs. The recent amendment in Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 provides for setting up of Asset Reconstruction Companies (ARCs) for acquiring financial assets including NPAs which helps in clearing the balance sheet of banks. The most important provision of this Act is regarding the enforcement of security interest of banks without the interventions of courts.

The Government of India has introduced the ‘Mission Indradhanush’ in August 2015 to restructure the Public Sector Banks in India, in order to overcome the problem of NPAs in Public Sector Banks. The seven points strategy of ‘Mission Indradhanush’ includes – Appointments, Banks board bureau, Capitalisation, De-stressing, Empowerment, Framework of accountability and Governance reforms (ABCDEFG). Following the global standards of Capital Adequacy Ratio (CAR) and in order to strengthen the regulation, supervision and risk management of the banking sector, Basel III norms are being implemented in India. Recently, The Reserve Bank of India has extended the timeline for full implementation of the      Basel III capital regulations by the Indian banks by March 31, 2019.

The problem of NPAs is not localised to the Indian economy only, but has been a global phenomenon. Due to the sub-prime mortgage crisis in year 2008 in USA economy, the issue of NPAs in banks came to the limelight and has affected the number of economies all over the world. Though the foundation of Indian banking sector is solid, there is a further scope for improvement in capital adequacy measures by the Indian banks. By taking a cue from global experiences and sub-prime crisis experience of USA, the damage done by NPAs in Indian banking sector could be effectively minimised. The corrective strategies introduced by the RBI and the Government of India is a welcome step and would certainly be beneficial in tackling the problem of NPAs in Indian economy.

(The author of this article ,Lt Col (Dr) Satish Dhage, is an ex Army officer and has been qualified for IPS (Indian Police Services) through IPS LCE 2012. Presently, he is Director, MGM Institute of Competitive Exams Aurangabad. For any queries or feedback, he can be contacted on email id : drsatishdhage@gmail.com)