In the past decade, several financial companies have made headlines with their NPAs. But what exactly are they? How are they impacting the financial sector? Do NPAs have an effect on India’s economy as a whole? This article will help you understand all this, let’s just dive right in!
What Is NPA?
When it comes to bank accounts, deposits made by the public are treated as liabilities, while loans and advances given by banks to their customers are treated as assets. According to the Reserve Bank of India, if the payments of interest or principle on the assets don't get paid for 90 days or more, they're considered non-performing assets (NPAs). Basically, those assets that have stopped working are NPAs.
Banks and finance companies must categorize non-performing assets (NPAs) into three categories: Substandard assets, doubtful assets, and loss assets. Substandard assets are those that have been classified as non-performing for less than 12 months, doubtful assets for 12 months, and loss assets for 12 months. According to the Reserve Institute of India (RBI), loss assets are considered to be uncollectible and of such low value that they cannot be kept as bankable assets, even though they may have some value.
Factors That Led To The Growth Of NPAs In The Past Couple Years
1. Economic Reasons
The economic downturn since 2008 has caused a rise in bad loans, with global demand still low and exports for all sectors showing a downward trend. In electricity, the weak financial situation of most state-owned banks is the issue, while in steel, the drop in global prices means more loans will need to be taken care of in the coming months.
The Economic Survey 2015 also mentioned over-leveraging by corporations as a reason for the rise in bad loans. Another issue is the lack of expertise in lending principles among loan officers, which is compounded by the frequent rotation of duties and the use of coercion techniques by banks to recover loans.
2. Political Pressure
The previous government's policy paralysis on public-private partnerships (PPPs) resulted in a delay in key economic decisions, which had a negative impact on macroeconomic stability and corporate performance. Additionally, it can be attributed to the prevalence of crony capitalism, with banks being forced to provide loans to certain sectors that are often in difficulty due to political pressure.
3. Bad Loans
Businesses had a hard time getting out of debt because there wasn't a good bankruptcy law in place, which caused a lot of bad loans to build up. Companies had to go through the legal process, which took a lot of time and caused problems for banks and finance companies.
What Is The Impact Of NPAs On The Indian Economy?
1. Stress In The Country’s Finance Companies
The stress in the finance industry means there's less money to put towards other projects, which has a negative effect on the economy as a whole. The banks are raising interest rates to keep their profit margin, and they're taking money away from good projects and putting it into bad ones.
2. The Impact On Borrowers
A high NPA will have an impact not only on the borrowers, but also on the borrowers with good credit ratings.
3. Rise In Current Account Deficit
The main reason for this is the rise in current account deficit, which has a direct impact on interest rates, cash reserve ratio, and statutory liquidity ratio.
4. Negative Effect On Public Sector Banks
The problem with public sector banks is that they don't give a good return to their shareholders, which means the government of India doesn't get as much money from the banks in the form of dividends. This can make it harder for the government to put money towards social and infrastructure projects, and it can lead to social and political costs.
Measures To Tackle NPAs
In order to effectively address Non-Performing Arrangements (NPAs), immediate remedial action is required. This action should include the implementation of technology and data analytics for the detection of early warning signals, the identification of hidden NPAs, the development of internal credit assessment skills, and forensic audits to gain insight into the borrower's intentions.
Various measures have been taken by leaders of renowned financial institutions to tackle the issue of NPAs. With respect to this, Abhay Bhutada, MD of Poonawalla Fincorp also revealed that the company aims to have a net NPA below one by the year 2025. This will further help improve the asset quality of the company according to Bhutada.
Bottom Line
Given how big the banking sector is, there's no denying that the issue of Non-Performing Assets (NPAs) needs to be addressed. It's a major threat to the overall health of India's economy. Looking into the current situation, it's clear that the issue is not just one-sided. It has to do with the economic slowdown, the tough business environment in India, problems with the legal system, and the banks' lack of operational efficiency. The RBI's recommendations are a big step in the right direction.
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