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NON-PERFORMING ASSETS AND ITS IMPACT ON BANKING SYSTEM Dr. Brajesh Kumar Singh
(Research Scholar), Department of Commerce & Management B.R.A. Bihar University, Muzaffarpur
Abstract-
Introduction:- Banking as institution, deals with lending and collection of money. It followed the basic law of demand and supply where persons having excess money lent to persons who needed it for more productive purpose and were willing to pay a price for this.
As long as asset generates the income expected from it and does no disclosed any unusual risk other than normal commercial risk, it is treated as performing asset, and it fails to generate the expected income, it becomes a Non-Performing Asset (NPA). In other words, a loan asset becomes a NPA when it ceases to generate income, i.e. interest, fees, commission, or any other dues for the bank for more than 90days. Thus NPAs are those loans given by a bank or financial institution where the borrower defaults or delays interest or principal payments.
It is observed that 73 percent of the member countries of the International Monetary Fund (IMF) have experienced serious banking problems but most of these member countries are developing nations. One of the prominent reasons for the crisis in the world is building up of non-performing assets in the banking and financial sector. India has also experienced the problem of rising NPAs.
Indian banking sector has been facing so many serious issues regarding the increasing level of Non-Performing Assets (NPAs). It is the one of the most important threatening issue faced by banking sector in current scenario. Through an efficient monetary mechanism and controlling measures Government can reduce the level of NPAs.
The issue of NPA is not just influencing the bank but also the entire economy. To maintain the profitability and efficiency of banks NPAs must to be controlled and reduced. The root of the issue of rising NPAs lies in the nature of overseeing credit chance by the bank and will full defaulters. The management of NPAs has a vital importance for strengthening our banking sector as well as our economy. At present Government ‗4R‘ strategy is very helpful to resolve NP Acrisis.
Keywords: Banking Sector, Economy, Non-Performing Assets, Economy and Government.
1 RESEARCH METHOD
The study is primarily analytical and descriptive based on secondary data collected from RBI publications, journals, reports and website of public and private sector banks in India.
1.1 Objective of the study:-
i. To analyze the trend on the NPAs ii. To analyze the major cause of NPAs iii. To study the impact of NPAs on
banks
iv. To reduce NPAs steps taken by the Government
2 NON-PERFORMING ASSETS (NPA) AN OVERVIEW
A ‗Non-Performing Asset‘ (NPA) was defined as a credit facility in respect of which is the interest and installment of principal has remained ‗past due‘ for specified period of time. Under the RBI(Reserve Bank of India) norms, an account is classified as a non-performing asset if it is not serviced for 90 days.
2.1. Classification of NPAs
Loan assets of the banks are broadly classified as Performing and Non- Performing asset, while non-performing asset is further classified into sub- standard, doubtful and loss assets.
Standard Assets– Standard asset is one which does not disclose any problems and which does not disclose any problems and which does not carry more than normal risk attached to the business. Such an asset should not be an NPA.
Substandard Assets– A substandard asset would be one, which has remained NPA for a
2 period less than or equal to 12 months.
Doubtful Assets– An asset would be classified as doubtful if it has remained in the sub-standard category for a period of more than 12 months.
Loss Asset – An asset that is an NPA for a period of more than 36
months is treated as a lost asset has been identified by the bank or internal or external auditors or by the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible.
2.2. Incidence of NPAs:-
According to data condition of NPA is bad for our country economic health. For the improvement of collection of Bad Loans collection process should be more
improved.
Reports say the label of stressed assets enhanced day by day and is not a good symbol for our economy.
Government has to improve the collection method of collecting loans EMI at proper time with proper resources which will be helpful for the growth of our economy.
2.3. Consequence of NPAs
The NPAs in the public sector banks are well above the normal level. The consequences envisaged during the past several years are many. It has become a difficult task for the banks to reduce the lending rate due to the presence of large NPAs. Ultimately this is affecting the competitiveness of the Indian banks.
When the bank does not enjoy the market competitiveness naturally the credit expansion would be slumped and when it happens, the profitability gets a set back.
In this way the vicious circle will go and on. Another important one is the reduction in the availability of funds for further expansion due to the unproductiveness of the existing portfolio.
Sometimes it is found that the presence of large NPAs discourages banks to accept
profitable but risky proposal loan from the customers the NPAs also affect the risk taking ability of the banks on the whole it affects the credibility of the bank and faces difficulty in raising fresh capital from the market for future requirements.
The efficiency of a bank is not reflected only by the size of its balance sheet but also the label of return on its assets. The NPAs do not generate interest income for bank but at the same time banks are required to provide provisions for NPAs from their current profits. The NPAs have deleterious impact on the return on assets in the following ways.
The interest income of bank will fall and it is to be accounted only on receipt basis. Banks profitability is affected adversely because of providing of doubtful debts and consequent to writing it off as bad debts. Return on investments (ROI) is reduced. The capital adequacy ratio is disturbed as NPAs are entering into its calculation. The cost of capital will go up. The assets liability mismatch will widen. The economic value addition(EVA) by bank get upset because EVA is equal
3 to the net operating profit minus cost of capital and it limits recycling of the funds.
2.4. Causes of rising Non-Performing Assets (NPA)
A robust banking sector is the backbone of the economy therefore to improve the health of the banking system we must look into account all the likely causes which can hinder its smooth performance.
― As per RBI inputs, the primary reasons for the spurt in stressed assets have been observed to be, inter-alia, aggressive lending practices, willful default/loan frauds/corruption in some cases, and economic slowdown.
Former RBI chief Raghuram Rajan has dissected the banking crisis in his recent analysis of non- performing asset (NPAs). He implies that cronyism is an important cause.
2.5 Present Position of NPAs
The Banks, generally keep these NPAs into three categories-sub-standard, doubtful and Aloss assets. Debts due for twelve monthor less than that and there is more possibility of receipt, are called sub-standard; debts due for more that twelve months and there is a doubt about its receipt are called doubtful and debts which have been declared ‗lost of assets‘;
a part of it may be received at one time settlement. Similarly banks put these NPAs in two groups– Gross NPAs and Net NPAs Gross NPA is the total sum of outstanding NPAs in the borrowers accounts, excluding the interest receivable. The net NPAs, as RBI defines, as gross NPAs minus (i) Balance in Interest Suspense Account, (ii) DICGC/ECGC claims received and held pending adjustment (iii) Part Payment received and kept in Suspense Account (iv) total provision held.
The NPAs position, in the past years is as follows–
Table 1
(Amount in Millions)
Year Gross NPA Gross Advance Ratio %
31st March 2016 6116074 81711142 7·48
31st March 2015 3229161 75606658 4.27
31st March 2014 2630152 68157479 3·83
31st March 2013 1927688 597188078 3·55
31st March 2012 1369683 46488078 2·95
31st March 2011 939969 39959815 2·35
31st March 2010 817189 32620788 2·51
31st March 2009 699537 30246518 2·31
Source— RBIs Data base an Indian Economy
The above table presents the position of NPA in past years. It shows the increasing trend year by year. It was at the lowest level in 2009, i.e. 2·31 percent of the total amount of advance in that year. It reached at 3·83% in 2014.. It increased nearly five times in only 10 years.
When it is analysed from the view of different types of banks (Public Sector Private Sector and Foreign) a new picture emerged. It is as follow—
Table 2 NPA of Banks in India (Amt. in million)
(Amt. in Million)
Year Public Sector Private Sector Foreign Banks
31st March 2016
Gross NPA 5399563 558531 157980
Gross Advance 58219511 19726538 3765043
Ratio 9·27% 2·83% 4·20%
31st March 2015
Gross NPA 2784679 336904 107578
Gross Advance 62899354 16073394 3366090
Ratio 4·43% 2·10% 3·20%
31st March 2014
Gross NPA 2272639 241835 115678
Gross Advance 52159196 13602528 2995755
Ratio 4·36% 1·78% 3·86%
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Source— RBIs Data Warehouse: Database on Indian Economy (RBI website) The above table shows that the
ratio of NPA of public sector bank (Nationalised banks) has always been higher in comparison to private banks and foreign banks. When ratio of NPA of public sector banks was 4·36% in 2014, it was only 1·78% in private banks and 3·86% in foreign banks. When the NPA of public sector banks increased 9·27% in 2016 the private sector banks and foreign banks NPA were 2·83% and 4·20%
only.Similarly, public sector banks NPA rose to 14·58.The private sector banks NPA rose to 4·62% and foreign banks NPA went to 3·81%, only. In other words, the NPA of public sector banks has always been nearly four times more than private sector banks.
2.6 What are the reasons for growth?
Governance Issues:
Diversion of funds by companies for purposes other than for which loans were taken.
Due diligence not done in initial disbursement of loans.
Inefficiencies in post disbursement monitoring of the problem.
Restructuring of loans done by banks earlier to avoid provisioning. Post crackdown by RBI, banks are forced to clear their asset books which has led to sudden spurt in NPAs
During the time of economic boom, overt optimism shown by corporates was taken on face value by banks and adequate background check was not done in advancing loan
In the absence of adequate governance mechanism, double leveraging by corporates, as pointed out by RBI‘s Financial Stability Report.
2.7 Economic Reasons
Economic downturn seen since 2008 has been a reason for increasing bad loan
Global demand is still low due to which exports across all sector has shown a declining trend for a long
In the case of sectors like electricity, the poor financial condition of most SEBs is the problem; in areas like steel, the collapse in global prices suggests
that a lot more loans will get stressed in the months ahead
Economic Survey 2015 mentioned over leveraging by corporate as one of the reasons behind rising bad loans
Another factor that can contribute to the low level of expertise in many big public sector banks is the constant rotation of duties among officers and the apparent lack of training in lending principles for the loan officers
Poor recovery and use of coercive techniques by banks in recovering loans
2.8 Political Reasons
Policy Paralysis seen during the previous government affected several PPP projects and key economic decisions were delayed which affected the macroeconomic stability leading to poorer corporate performance.
Crony capitalism is also to be blamed.
Under political pressure banks are compelled to provide loans for certain sectors which are mostly stressed
2.9 Problems of Exit
In the absence of a proper bankruptcy law, corporate faced exit barriers which led to piling up of bad loans
Corporates often take the legal route which is time consuming leading to problems for the banks 2.10 Impacts of NPAs:
The higher is the amount of non- performing assets (NPA) the weaker will be the bank‘s revenue stream.
Indian Banking sector has been facing the NPA issue due to the mismanagement in the loan distribution carried by the Public sector banks.
As the NPAs of the banks will rise, it will bring a scarcity of funds in the Indian markets. Few banks will be willing to lend if they are not sure of the recovery of their money.
The shareholders of the banks will lose of money as banks themselves
5 will find it tough to survive in the market.
This will lead to a crisis situation in the market.
The price of loans, interest rates will shoot up badly. Shooting of interest rates will directly impact the investors who wish to take loans for setting up infrastructural, industrial projects etc.
It will also impact the retail consumers, who will have to shell out a higher interest rate for a loan.
All these factors hurt the overall demand in the Indian economy.
Finally, it will lead to lower growth and higher inflation because of the higher cost of capital.
2.11 Steps proposed by RBI:
Restructured standard account provisioning has been increased to 5% making it easier for banks to go for restructuring.
On the flip side, this has the potential to enhance tendency of ever greening of loans.
RBI has directed banks to give loans by looking at CIBIL score and is encouraging banks to start sharing information amongst themselves.
RBI has directed banks to report to Central Repository of Information on Large Credit (CRILC) when principle/interest payment not paid between 61-90 days
RBI has asked banks to conduct sector wise/activity wise analysis of NPA
SEBI has eased norms for banks to convert debt of distressed borrowers into equity.
2.12 Government initiatives to tackle NPAs:
Promulgation of Banking Regulation (Amendment) Ordinance: It helps in the following ways:
It empowers the RBI to direct Banks to initiate insolvency resolution, wherever such need arises.
It also give advise to baking agencies on ways of tackling with its stressed asset problems.
It aims to check this menace in a time bound manner and helps in timely recovery of the stressed assets.
Incorporation of SARFAESI ACT:
The Securitization and Reconstruction of Financial assets and Enforcement of Security Interest Act 2002 empowers the banking systems to auction residential or commercial properties (except agricultural land) to recover their loans.
Debt Recovery Acts: These laws established debt recovery tribunals with the power to recover debts of Banks and Financial Institutions.
Concept of Bad Banks: In this concept the banking institutions sell their bad loans to an intermediary and thus they write off their bad loan and intermediary has to recover the loan from the defaulter.
Mediation for loan recovery: This concept was introduced so that genuine defaulter, who are unable to pay off their loans, but are not able to put forward their situations with the banking authorities, hire a mediator, who discusses this with the banking officer and come to a solution.
Strategic Debt Restructuring (SDR): Creditors could take over the assets of the firms and sell them to new owners.
Sustainable Structuring of Stressed Assets (S4A): An independent agency hired by the banks will decide on how much of the stressed debt of a company is sustainable
The government recently passed an ordinance to amend certain sections of the Banking Regulation Act, 1949: This allow the banking companies to resolve the issue related to stressed assets by initiating the insolvency proceedings whenever required.
This is in addition to the recently promulgated Insolvency and Bankruptcy Code, 2016 which provides for time bound resolutions of stressed assets.
Government promulgated the Banking Regulation(Amendment)
6 Ordinance, 2017 with the following features:
3. CONCLUSION & SUGGESTIONS Banking is the backbone of every economy. Credit creation is the main function of the bank. There has been an increase in the credit flow to various sectors of the economy such as infrastructures industry, services and agriculture. But simultaneously there has also been an increase in the non- performing assets (NPAs) in the Indian Banking Sector. NPAs have direct impact on the profitability and the net worth of the banks. The banks have to take initiatives to bring down the non- performing assets. Our government 4R plan is the most prominent plan for the reducing NPAs. Over the last four years government has taken comprehensive steps under its 4R‘s strategy of recognizing NPAs transparently, resolving and recovering value from stressed accounts recapitalizing financial ecosystem to ensure the responsible and clean system.
4 SUGGESTIONS
NPA will have to be reduced drastically and for the same purpose the following reforms are suggested:-
Reducing the existing NPAs and curbing their further build up.
Don‘t consider projects with old technology for finance.
Don‘t consider financing term loans for maturities longer than 5 year except in case of agriculture, infrastructure and SSI.
Increasing the number of debt recovery Tribunals.
Eliminate political interference in disbursing loans.
REFERENCES
1. Bhasin, Niti (2006), Banking Development in India 1947-2007 Growth Reforms and Outlook, New century publications, New Delhi 2. Dong He (2002), ―Resolving Non-Performing Assets of The Indian Banking System‖, Munich personal RePEc Archive (MPRA).
3. Jain Danendra (2009) , Why Poor Credit Growth in Banks
4. The problem of rising non-performing assets in banking sector in India; comparative analysis of public and private sector banks https://researchgate.net, International Journal of Management ITs Engineering, volume 7
5. Bhatia Non-Performing Assets of India Public, Private and Foreign Sector Banks, An Empirical Assessment ―ICFAI, Journal of Bank Management vol-6, No-3 pp- 7-28, 2007 6. Pragya Prasant Gupta (2016) ―A Curse for Indian Banking Sector‖ Abhinav journal of research in commerce and management Vol-5 no. 8 August 2016 pp 32-139
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