Non Performing Assets (NPAs)

What’s in Today’s Article?

• Why in News?
• What are Non-Performing Assets (NPAs)?
• Impact of NPAs and Current Situation and Future Prediction for India
• News Summary Regarding Recent RBI Proposal on NPA Tag

Why in News?

• The Reserve Bank of India (RBI) proposed that lenders should classify a borrower as a “wilful defaulter” within 6 months of their account being declared a non-performing asset (NPA).
• The RBI did not earlier have a specific timeline within which such borrowers had to be identified.

What are Non-Performing Assets (NPAs)?

• Definition: A NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
  • For banks, a loan is an asset because the interest paid on these loans is one of the most significant sources of income for the bank.
  • When customers, retail or corporates, are not able to pay the interest, the asset becomes ‘non-performing’ for the bank because it is not earning anything for the bank.
  • Therefore, the RBI has defined NPAs as assets that stop generating income for banks.
  • Banks are required to make their NPAs numbers public and to the RBI as well from time to time.
• Classification of assets: As per the RBI guideline, banks are required to classify NPAs further into:
  • Substandard assets: Assets which have remained NPA for a period less than or equal to 12 months.
  • Doubtful assets: An asset that has remained in the substandard category for a period of 12 months.
  • Loss assets: It is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some recovery value.
• NPA Provisioning: Provision for a loan refers to a certain percentage of loan amount set aside by the banks.
  • The standard rate of provisioning for loans in Indian banks varies from 5-20% depending on the business sector and the repayment capacity of the borrower.
  • In the cases of NPA, 100% provisioning is required in accordance with the Basel-III norms.
• GNPA and NNPA: There are primarily two metrics that help us to understand the NPA situation of any bank.
  • GNPA: It is an absolute amount that tells about the total value of gross NPAs for the bank in a particular quarter or financial year as the case may be.
  • NNPA: Net NPAs subtracts the provisions made by the bank from the gross NPA. Therefore, net NPA gives the exact value of NPAs after the bank has made specific provisions for it.
• NPA Ratios: NPAs can also be expressed as a percentage of total advances. It gives us an idea of how much of the total advances is not recoverable. For example,
  • GNPA ratio is the ratio of the total GNPA of the total advances.
  • NNPA ratio uses net NPA to find out the ratio to the total advances.

Impact of NPAs and Current Situation and Future Prediction for India:

• Impact of NPAs:
  • Banks don’t have sufficient funds for lending for other productive activities in the economy.
  • In order to maintain their profit margins, banks will be forced to increase interest rates.
  • Due to curb in investments, there may be a rise in unemployment rates.
  • Banks can either keep the NPAs in their books in the hope to recover it or make provisions for it, or write off the loans entirely as bad debt.
• Current Situation of NPAs in India:
  • According to the latest edition of RBI’s Financial Stability Report, scheduled commercial banks' (SCB) gross NPA ratio fell to a 10-year low of 3.9% in March 2023.
  • Gross and net NPA ratios have fallen from a high of 11.5% and 6.1% in March 2018 to 3.9% and 1.0% in March 2023 respectively.
  • One of the reasons for the fall in gross NPA in 2022-23 was large write-offs by banks.
• A prediction for India:
  • As per the stress test results, the GNPA ratio of all SCBs may improve to 3.6% by March 2024.
  • However, if the macroeconomic environment worsens to a medium or severe stress scenario, the GNPA ratio may rise to 4.1% and 5.1%, respectively.

News Summary Regarding Recent RBI Proposal on NPA Tag:

• The RBI identifies wilful defaulters as those who have the ability to pay a bank’s dues but do not or divert bank funds.
  • A large defaulter means a defaulter with an outstanding amount of Rs 1 crore and above, and whose account has been classified as doubtful or loss.
  • A wilful defaulter means a borrower or a guarantor who has committed wilful default and the outstanding amount is Rs 25 lakh and above.
• According to the RBI’s draft norms proposed,
  • The lender shall examine the ‘wilful default’ aspect in all accounts with outstanding amount of Rs 25 lakh and above or as may be notified by the RBI from time to time, and
  • Complete the process of classification/ declaring the borrower as a wilful defaulter within six (6) months of the account being classified as NPA.
  • The evidence of wilful default needs to be examined by an Identification Committee, to be set up by lenders.
  • Lenders should complete the investigation from a wilful default angle in every case before transferring the credit facility to other lenders or asset reconstruction companies (ARCs).
• Other aspects of the RBI’s draft norms proposed:
  • No additional credit facility be granted by any lender to a wilful defaulter or any entity with which a wilful defaulter is associated.
  • The bar on additional credit facility shall be effective up to a year after the name of wilful defaulter has been removed from the List of Wilful Defaulters (LWD) by the lenders.
  • As per the norms, wilful defaulters will not be eligible for restructuring of credit facility.
• The revision of norms comes after a review of the instructions and consideration of various judgments and orders from the SC and HCs.

Q1) What is the 4R’s strategy of the Government of India to control non-performing assets (NPAs)?

The GoI has implemented a comprehensive 4R’s strategy, consisting of recognition of NPAs transparently, resolution and recovery of value from stressed accounts, recapitalisation of PSBs, and reforms in PSBs and the wider financial ecosystem for a responsible and clean system.

Q2) What is the SARFAESI Act?

The SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest) Act 2002 allows banks and other financial institutions for auctioning commercial or residential properties to recover a loan when a borrower fails to repay the loan amount.

Source: Declare wilful defaulters within 6 months of NPA tag: RBI proposal