Classification Of Npa - Indian Economy
Introduction
Loans and arrears made by banks or other financial institutions that have a principal and interest payment delay of more than 90 days are classified as non-performing assets (NPA). The number of days that principal and interest must be paid is the basis for the NPA classification. It is categorized as Loss assets, substandard assets, and Doubtful assets. Let’s look at the definition, classification, and trends of NPA in this article.
Non-Performing Assets: What Are They?
• Non-performing assets are those that no longer bring in revenue for the bank.
• In the past, an asset's non-performing asset (NPA) status was determined by the idea of "Past Due."
• A credit for which interest and/or principal payments have been "past due" for a predetermined amount of time is referred to as a "non-performing asset" (NPA).
• '90 days' overdue rules for identifying NPAs were made effective beginning with the fiscal year ended March 31, 2004, to move towards worldwide best practices and promote greater transparency.
• Banks typically classify commercial loans that are more than 90 days past due and consumer loans that are more than 180 days past due as nonperforming assets.
• If the interest or principal installment is not paid for two harvest seasons, NPAs have been declared in the case of agricultural loans.
• However, this time frame shouldn't exceed two years. After two years, any unpaid loan or installment would be labelled as NPA.
Identifying Non-Performing Assets
• When the NPAs have aged = 12 months, it is subpar.
• Doubtful: After the NPAs have aged for more than a year.
• Assets that have suffered losses but have not yet been written off by the bank or its auditors are referred to as loss assets.
• Consider, for illustration, a commercial loan made on January 1st, 2015, with interest and principal repayment due on the fifth of each month. Since January 2016, the company has stopped making payments and missed others.
• If the loan is not repaid by April 5, 2016, it is categorized as an NPA.
• Up to April 5, 2017, it is referred to as a sub-standard asset if it is not repaid after that.
• The asset is categorized as a questionable asset if the repayment is past due as of April 5, 2017.
• The bank classifies this business loan as loss assets when it determines it can no longer be repaid.
Trends of Non-Performing Asset
• Due to many attempts by the Reserve Bank of India and the central government, including the Insolvency and Bankruptcy Code, the repeal of earlier policies like the 5:25 rule, etc., the NPA was on a downward trend beginning in FY 2018.
• It was anticipated that the country will experience a rise in defaulted loans as a result of the coronavirus (COVID-19) epidemic and lockdown.
• Based on the value for September 2020, the Reserve Bank of India forecast three scenarios for the fiscal year 2022 until September 2021.
• The GNPA-ratio would hit a new high of 13.5% under the baseline scenario.
Causes of India's Rising NPAS
Historical elements
• The Indian economy grew rapidly from the beginning of the 2000s till 2008. Banks during this time, especially those in the public sector, made large business loans.
• However, the majority of firms have seen a fall in profitability as a result of the slowing global economy, limitations on mining projects, hold-ups in obtaining environmental licenses that have an impact on the steel, iron, and power industries, as well as the volatility and shortage of raw materials.
• The fundamental cause of the rise in nonperforming assets (NPA) at public sector banks is that this has negatively impacted their capacity to repay loans.
Loosened lending standards
• The easing of lending requirements, particularly for corporate executives whose financial status and credit rating are not carefully reviewed, is one of the major contributors to rising NPA.
• Additionally, banks are aggressively marketing unsecured loans in order to compete, which adds to the high level of nonperforming assets (NPAs).
Ineffective backup plan
• Due to a lack of contingency planning, banks did not conduct enough emergency planning, especially for managing project risk.
• They failed to take into account potential outcomes like the collapse of the process for acquiring property for the motorway or the failure of gas projects to guarantee gas supply.
Poor loan servicing and restructuring
• Enterprises with more severe over-leverage and under-profitability difficulties were given the option of restructuring their credit facilities. Public sector banks were more likely to have this problem.
Unexpected circumstances
• Economic shocks like Covid 19 and demonetization are unpredictable.
• The difficulty with willful defaulters
• Investing money in shady ventures or other unrelated firms.
• There are lapses because there is a lack of diligence.
• For instance, willful defaulters are the outcome of business misconduct.
Poor Governance
• Mismanagement and policy paralysis cause loans to become non-performing assets (NPAs), which slows down projects' timelines and progress. Consider the Infrastructure Sector, for example.
• Due to social, political, cultural, and environmental factors, land acquisition is being delayed.
• Losses in business have been caused by changes in the regulatory and corporate environment.
• Particularly following government loan forgiveness programs, morale was poor.
Unhealthy Competition
• Intense rivalry in a particular commercial sector. Think about the telecom sector in India.
NPAS' Effects
• Twin Balance Sheet Syndrome: Caused by the impact of NPAs, this condition prevents investment-led growth by causing both banks and enterprises to have stretched balance sheets.
• Judicial workload: Cases involving NPAs add to the already heavy workload of the judiciary.
• Reduced Profits: Lenders' profit margins are decreasing.
• Stress in the financial industry results in less money being available to fund other projects, which has a detrimental effect on the economy as a whole.
• Ineffective transmission of monetary policy: Banks are boosting interest rates to maintain their profit margins.
• Money is being misdirected from worthwhile projects to unsuccessful ones.
• Unemployment: It's probable that there will be unemployment as a result of the stagnation of investments.
• Reduced tax revenue: When it comes to public sector banks, bad financial standing equates to poor shareholder returns, which reduces the amount of dividends paid to the Indian government. As a result, it might make it more difficult to spend money for infrastructure and social development, which would have social and political implications.
• Investors do not get the rewards they are owed.
Strategies To Reduce NPAS
• In India, NPAs are not a recent issue, and the government has made numerous efforts to deal with them on the legal, financial, and regulatory levels. In 1991, the Narasimhan Committee proposed a number of actions to address nonperforming assets (NPAs). Some of these were applied in real life.
DRTs (Debt Recovery Tribunals)
• In 1993, the Debt Recovery Tribunals (DRTs) were created.
• In order to speed up the resolution of disputes. They are subject to the guidelines set forth in the Recovery of Debt Due to Banks and Financial Institutions Act of 1993. Due to their small size, they experience a backlog of cases, many of which have been outstanding for more than two years.
Credit Bureau Information (CIB)
• The Credit Information Bureau (CIB) was founded in the year 2000.
• A reliable information system is necessary to prevent loans from falling into the wrong hands and, as a result, NPAs. The tracking and sharing of individual and willful defaulter’s benefits banks.
Lok Adalats: 2001
• Although they are helpful in handling and recovering small loans, the RBI guidelines put in place in 2001 only allow them to be used for loans up to 5 lakh rupees. They are advantageous in that they limit the number of instances that end up in court.
Compromise Settlement: 2000
• It gives an easy path for NPA recovery for advances less Rs. 10 crores. Cases of fraud and willful default are not included. Both court-filed litigation and DRTs (Debt Recovery Tribunals) are covered.
SARFAESI Act
• Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) of 2002 - Through the purchase and sale of secured assets in NPA accounts with an outstanding balance of Rs. 1 lakh or more, the Act enables banks and other financial institutions to recover their nonperforming assets (NPAs) without the assistance of a court.
• The banks must first notify everyone. If the borrower doesn't pay, they can then do the following:
o Take control of the borrowing concern's management and/or security.
o Decide who will be in charge of solving the issue.
Assets Reconstruction Companies (ARC)
• The RBI has licensed 14 more ARCs as a result of the SARFAESI Act of 2002's amendment. These companies were established to recover value from bad loans. Lenders had to go through a drawn-out legal process to enforce their security interests before this statute was passed.
Restructuring of Corporate Debt - 2005
• By reducing the interest rates charged and extending the time it takes to repay the debt, it aims to lessen the company's debt load.
5:25 rule
• In 2014, the 5:25 rule came into effect.
• Another name for it is Flexible Structuring of Long-Term Project Loans to Infrastructure and Core Industries. It was advised that such organizations maintain their cash flow due to the lengthy project deadlines and the lengthy time it takes for money to enter their books, necessitating the requirement for loans every 5-7 years and, consequently, refinancing for long-term projects.
Joint Lenders Forum 2014
• All PSBs with stressed loans were included, which is how it came about. It exists to stop many banks from lending to the same person or business. It was developed to stop instances where someone might accept a loan from one bank in exchange for a loan from another.
Indradhanush Framework 2015
• Since the nationalization of the banking industry in 1970, ABCDEFG's most extensive reform initiative to restructure PSBs and enhance their general performance has been the Indradhanush framework.
• Appointments: A separate position of Chairman and Managing Director will be created, with the CEO gaining the title of MD & CEO, and a non-executive Chairman of PSBs will be appointed based on international best practices and guidelines in the Companies Act.
• The Bank Board Bureau will choose Whole-time Directors and non-Executive Chairman of PSBs in place of the Appointments Board.
• Capitalization: The finance ministry estimates that approximately Rs. 1, 80,000 crore in capital will be needed over the next four years, of which the government will contribute 70% and PSBs will be required to raise the remaining 20% from the market.
• Destressing: To keep stressed assets out of banks, de-stressing requires addressing issues in the infrastructure sector and supporting asset reconstruction businesses. The development of a flourishing PSB debt market.
• Empowerment: When it comes to hiring workers, PSBs should be allowed more latitude and discretion.
• Accountability framework: A few key performance indicators will be used to gauge the banks' performance. It would contain all of it.
• Management of non-performing assets, expansion, variety, return on investment, financial inclusion, and other quantitative indicators
• Examples of qualitative parameters include actions taken to increase asset quality, human resource initiatives, and so on.
• Governance Reforms: Meetings called Banker's Retreats or Gyan Sangams between bankers and government representatives to discuss issues affecting the banking industry and decide on a plan of action.
Strategic Debt Restructuring, or SDR
• In accordance with this programme, banks that have given a corporate borrower a loan have the choice to convert all or a portion of their loan into equity shares in the business that has accepted the loan.
• Its principal objective is to increase promoters' stake in saving strained accounts and to give banks stronger instruments for bringing about a change in ownership when necessary.
Asset Quality Review 2015
• Determine the status of stressed assets and put aside funds for them to ensure the long-term survival of the banks. Early detection of stressed assets and necessary action taken to keep them from becoming strained.
Sustainable Asset Structuring 2016
• It is intended to serve as a supplemental framework for settling accounts that are under a lot of pressure.
• It comprises calculating the sustainable debt level of a stressed borrower and dividing outstanding debt into sustainable debt and equity/quasi-equity instruments that are expected to provide upside to lenders if the borrower recovers.
Insolvency And Bankruptcy Code 2016
• It was developed to address India's departure issue, or the Chakravyuaha Challenge (Economic Survey).
• By consolidating and amending the laws governing the timely reorganization and insolvency resolution of corporate persons, partnership firms, and individuals, as well as matters related to or incidental to such reorganization and insolvency resolution, this law seeks to promote entrepreneurship, credit availability, and strike a balance between the interests of all stakeholders.
Public Arc Vs. Private Arc 2017
• This controversy, which has lately been in the headlines, pits the notion of a private ARC, as proposed by RBI deputy governor Mr Viral Acharya, against a public ARC, which is wholly funded and managed by the government, as suggested by this year's Economic Survey.
• An economic analysis gave it the moniker "Public Asset Rehabilitation Agency," and the plan is based on how well a comparable organization operated during the 1997 East Asian financial crisis.
Bad Banks 2017
The creation of a bad bank that will take on all stressed loans and manage them in accordance with adaptable norms and methods is also mentioned in Bad Banks 2017 Economic Survey 16-17.
Giving PSB balance sheets more space will benefit them.
Conclusion
NPAs cost the lender money, and a high number of NPAs over time may alert regulators that the bank's ability to meet its financial obligations is in jeopardy. By seizing any collateral or selling the loan to a collection agency at a substantial discount, lenders can recoup their losses.