A Non-Performing Asset (NPA) is a loan or advance for which the principal or interest payment has remained overdue for 90 days or more.
In simpler terms, when a borrower stops repaying a loan, the bank classifies it as an NPA.
Categories of NPAs
The Reserve Bank of India (RBI) classifies NPAs into three categories based on the duration of overdue payments:
| Category | Definition |
|---|---|
| Substandard Assets | Loans overdue for less than or equal to 12 months. |
| Doubtful Assets | Loans overdue for more than 12 months but still collectible. |
| Loss Assets | Loans that are considered uncollectible and written off. |
Impact of NPAs on Banks
NPAs affect banks in several ways, including:
- Erosion of Profits: Banks earn lower interest income, leading to declining profitability.
- Reduced Lending Capacity: Funds locked in NPAs limit banks' ability to extend new loans.
- Capital Adequacy Concerns: High NPAs require increased provisioning, reducing available capital.
- Reputation Damage: High NPAs can diminish customer trust and investor confidence.
Reasons for Rising NPAs in India
1. Economic Slowdown
An economic downturn reduces the repayment capacity of borrowers, leading to loan defaults.
2. Poor Lending Practices
Aggressive lending during economic booms without adequate due diligence often results in NPAs.
3. External Factors
- Global Financial Crises: Events like the 2008 crisis disrupt businesses globally.
- Industry-Specific Issues: Sectors like power, steel, and infrastructure often face cyclical challenges.
4. Political and Policy Issues
- Delays in project approvals or land acquisition hamper business performance.
- Political pressure on public sector banks to lend to unviable projects.
5. Wilful Defaulters
Borrowers who deliberately avoid repayment despite having the capacity to pay contribute significantly to NPAs.
NPA Management Framework
To combat the NPA problem, Indian banks employ several measures, often guided by RBI directives.
1. Early Recognition of Stress
Banks monitor loan accounts closely to identify signs of stress and initiate corrective measures before they turn into NPAs.
2. Loan Restructuring
Involves revising loan terms, such as extending repayment periods or reducing interest rates, to make repayment easier for borrowers.
3. Asset Reconstruction Companies (ARCs)
Banks sell NPAs to ARCs, which specialize in recovering bad loans by restructuring or liquidating assets.
4. Legal Frameworks for Recovery
| Law/Mechanism | Purpose |
|---|---|
| SARFAESI Act, 2002 | Allows banks to seize and sell assets of defaulting borrowers. |
| Debt Recovery Tribunals (DRTs) | Speedy resolution of disputes and recovery of bad loans. |
| Insolvency and Bankruptcy Code (IBC), 2016 | Provides a time-bound framework for resolving stressed assets. |
5. RBI’s Prompt Corrective Action (PCA) Framework
Banks with high NPAs are placed under the PCA framework, which imposes restrictions on lending and branch expansion.
Government Initiatives for NPA Management
1. Mission Indradhanush
A seven-point program aimed at improving public sector bank performance, including better NPA management.
2. Public Asset Management Company (PAMC)
Proposed to act as a bad bank by taking over large NPAs from banks and resolving them.
3. Recapitalization of Banks
The government has periodically infused capital into public sector banks to cover losses from NPAs.
4. Pradhan Mantri Jan Dhan Yojana (PMJDY)
Although primarily a financial inclusion initiative, PMJDY also aims to reduce reliance on informal credit, which contributes to NPAs.
Data Insights: NPA Trends in Indian Banks
| Year | Gross NPAs (₹ Crore) | Gross NPA Ratio (%) |
|---|---|---|
| 2016-17 | 7,39,541 | 11.2% |
| 2018-19 | 8,95,600 | 9.1% |
| 2020-21 | 7,12,000 | 7.5% |
| 2022-23 | ~6,00,000 (estimated) | 6.8% |
The Gross NPA ratio has seen a decline due to active management and recovery efforts.
Techniques for NPA Reduction
Banks are now leveraging technology and partnerships for better NPA management.
1. Artificial Intelligence and Machine Learning
Predictive analytics helps banks identify high-risk loans early.
2. Central Repository of Information on Large Credits (CRILC)
A database maintained by the RBI to track large borrowers across banks, preventing multiple loans to risky entities.
3. Digital Lending Platforms
Streamlined and data-driven lending processes reduce errors in credit assessment.
Challenges in NPA Management
- Legal Delays: Recovery processes often get stuck in lengthy court battles.
- Lack of Data: Smaller banks may lack the infrastructure to maintain robust borrower profiles.
- High Costs: Recovery mechanisms can be expensive and time-consuming.
Conclusion
Effective NPA management is vital for the health of the banking sector. By leveraging legal, technological, and operational tools, banks can significantly reduce their bad loan burden.