Origin and Trends of Non-performing Assets in Banking Sector

Non-Performing Assets is an important indicator to assess the financial growth of a country. Accumulation of more NPAs could distress a country's overall economic growth. Recently RBI released a report which states that the number of NPAs will nearly double in a year due to COVID-19 pandemic.

A loan which is not paid and considered default are considered as NPAs. The period beyond the due date past which interest amount or the principal amount is not paid or missed is 90 days in India. NPAs can distress banks in two ways: first it will stop earning interest income; second it has fewer money to lend, as it needs to repay the depositors. This also reduces the credibility of common people in the banking system.

NPAs have a direct impact on the overall economy as when NPA rises interest rate bank charges on loans also increases, asset prices also decrease. Since large NPAs accumulation leads to paucity of funds, it indirectly discourages growth of entrepreneurship and private sector in the economy which further leads to the problems like unemployment. The outbreak of the pandemic has a devastating impact on Indian economy as growth plummets and prior projects turn to losses.

Recent report of the RBI says that a major chunk of NPAs is collected in Public Sector Banks. Here is the time series report which shows the percentage of NPAs to the total assets of Commercial, PSBs and private sector banks.

NPAs of different banking sector as percentage of total assets from 2007-08 to 2018-19

After the Global Financial Crisis, the share of NPAs rises significantly in banking sector with around 1.3% in beginning in all banks rose to about 7.3% in PSBs, 5.6% in Scheduled Commercial Banks, 3.5% in Private sector and 1.5% in case of Foreign Banks in year 2018-2019

Why do PSBs have a larger share of NPAs?

From the given dataset it can be inferred that the NPAs as a percentage of total assets is significantly high in case of Public Sector Banks this is due to the fact that PSBs have to follow certain government regulation and give loans to priority sectors. Procedural inefficiencies vis-à-vis a private bank, generally all private sector banks take a field inspection and telephonic conversation before disbursing the loan; the same is not true with private and foreign banks. The management of PSBs remains under political pressure which result in issues like inefficient lending, opening and closing of new branches.

Way forward to the problem

To recognize and solve the problems related to NPAs certain steps have been taken by RBI which include:

Prompt Action Corrective framework: Under this, banks with weak financial metrics are put under watch by the RBI. The PCA framework deems banks risky if they slip below certain norms on three parameters - capital ratios, asset quality, and profitability.

Insolvency and Bankruptcy Code: The act provides a time bound 180 days period for recovering insolvent accounts where the borrower is unable to pay back the amount. Recent RBI reports show that SCBs recover more than 45% of their loans through IBC.