When a bank offers a loan, it charges interest on the amount, which is why it is regarded as an asset to the bank. When the borrower stops paying the interest, or the principal, or both, the lender loses money. Such a loan then becomes a non-performing asset (NPA) for the bank. The banking industry in India is seriously affected by the NPA crisis with the rising number of defaulters.
As per the Reserve Bank of India (RBI), a loan is considered a “bad loan”, or an NPA when the interest due for any quarter is not fully paid within 90 days from the end of the quarter. However, this time period may vary based on the terms and conditions agreed upon by the bank and the borrower.
A commonly accepted definition of NPA is: “An asset, including a leased asset, becomes nonperforming when it ceases to generate income for the bank.”
In September 2008 the gross non-performing assets (GNPAs) of Indian Banks was 53,917 crore the bad loans have now grown to RS-3,41,641 crore in September 2015. (Before the 2008 global financial crisis broke out following the collapse of Lehman brothers)
WHAT LED TO THE RISE IN NPAS?
Some of the factors leading to the increased occurrence of NPAs are external, such as decreases in global commodity prices leading to slower exports. Some are more intrinsic to the Indian banking sector.
A lot of the loans currently classified as NPAs originated in the mid-2000s, at a time when the economy was booming and business outlook was very positive. Large corporations were granted loans for projects based on extrapolation of their recent growth and performance. With loans being available more easily than before, corporations grew highly leveraged, implying that most financing was through external borrowings rather than internal promoter equity. But as economic growth stagnated following the global financial crisis of 2008, the repayment capability of these corporations decreased. This contributed to what is now known as India’s Twin Balance Sheet problem, where both the banking sector (that gives loans) and the corporate sector (that takes and has to repay these loans) have come under financial stress.
When the project for which the loan was taken started underperforming, borrowers lost their capability of paying back the bank. The banks at this time took to the practice of ‘evergreening’, where fresh loans were given to some promoters to enable them to pay off their interest. This effectively pushed the recognition of these loans as non-performing to a later date, but did not address the root causes of their unprofitability.
WHAT CAN BE THE POSSIBLE REASONS FOR NPAS?
• Diversification of funds to unrelated business/fraud.
• Lapses due to diligence.
• Busines losses due to changes in business/regulatory environment.
• Lack of morale, particularly after government schemes which had written off loans.
• Global, regional or national financial crisis which results in erosion of margins and profits of companies, therefore, stressing their balance sheet which finally results into non-servicing of interest and loan payments. (For example, the 2008 global financial crisis).
• The general slowdown of entire economy for example after 2011 there was a slowdown in the Indian Economy which resulted in the faster growth of NPAs.
• The slowdown in a specific industrial segment, therefore, companies in that area bear the heat and some may become NPAs.
• Unplanned expansion of corporate houses during the boom period and loan taken at low rates later being serviced at high rates, therefore, resulting in NPAs.
• Due to mal-administration by the corporates, for example, willful defaulters.
• Due to misgovernance and policy paralysis which hampers the timeline and speed of projects, therefore, loans become NPAs. For example, the Infrastructure Sector.
• Severe competition in any particular market segment. For example, the Telecom sector in India.
• Delay in land acquisition due to social, political, cultural and environmental reasons.
• A bad lending practice which is a non-transparent way of giving loans.
• Due to natural reasons such as floods, droughts, disease outbreak, earthquakes, tsunami etc.
• Cheap import due to dumping leads to business loss of domestic companies. For example, the Steel sector in India.
However, the important point is to understand the cruciality of the NPA crisis; and take appropriate remedial action. These actions should include:
1. Using data analysis and technologically upgraded frameworks to identify the warning signs early
2. Formulation of Mechanisms to identify hidden NPAs
3. Development of internal skills for efficient credit assessment.
4. Conducting forensic audits to understand the intent of the borrower
MEASURES TAKEN TO TACKLE NPA CRISIS IN INDIA
Although it has risen disproportionately in contemporary times, NPA is not a new problem. Over the years, there have been several reform measures undertaken by the government at various levels to bring it down. Some of the important ones are:
1. Debts Recovery Tribunal (Procedure) Rules - 1993
2. The Credit Information Bureau (India) Ltd - 2000
3. Lok Adalat’s -2001
4. Compromise Settlement - 2001
5. SARFAESI Act – 2002
6. Asset Reconstruction Companies (ARC)
7. Corporate Debt Restructuring - 2005
8. Joint Lenders’ Forum - 2014
9. Mission Indradhanush - 2015
10. Strategic Debt Restructuring - 2015
11. Asset Quality Review - 2015
12. Sustainable Structuring of Stressed Assets - 2016
13. Insolvency and Bankruptcy Code - 2016
14. Public ARC Vs Private ARC - 2017