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Q. Examine how rising NPAs poses a serious concern on growth of Indian Economy and
give an account on implementation of Narasimhan Committee on NPA’s.

The Definition of NPA given by the Reserve Bank of India (RBI)

The asset is categorised as non-performing asset when it stops generating income for the
bank. As per the RBI, “NPA is a loan or an advance where interest and/ or instalment of
principal remains overdue for a period of more than 90 days in respect of a term loan”.
Categories of Non-Performing Assets (NPAs) Depending upon the period up to which a
loan has remained as NPA, it is classified into three types:

Substandard Assets: An asset which remains as NPA for less than or equal to 12 months.

Doubtful Assets: An asset which remained in the above category for 12 months.

Loss Assets: These are assets where loss has been identified by the bank or the RBI.
However, there may be some value remaining in it and hence the loan has not been not
completely written off.

India’s NPA Problem

There are about 7 lakh crore worth loans which have been classified as Non-Performing
Asset in India. This is a massive amount showing the gravity of the NPA problem in India.

This figure is actually around 10 percent of all loans disbursed by the bank. This exposes the
fact that about 10 percent of loans are not paid back translating into huge loss of money
to the banks. This NPA problem has corroded the health of the banking system in India.

The enormity of the problem is further exposed by the fact that when restructured and
unrecognised assets are added into the NPAs then the total stressed asset zooms upto
about 15-20 percent of total loans disbursed by the bank.

Reasons for prevalence of Non-Performing Assets (NPAs)

1. There are serious inefficiencies related to monitoring of loans in the post-

disbursement phase.

2. Earlier the banks had done restructuring of loans to artificially show that they had a
healthy balance sheet. After the crackdown by the RBI, banks were forced to clear
their asset books which led to a quick ascent in NPAs.

3. There is subdued global demand and India’s exports across various sectors have
shown a downward trend leading to losses for companies. This means that these
companies are unable to pay back the loans from banks leading to a spurt in NPAs.

4. As far as the sectors like electricity are concerned, the miserable financial condition
of most state electricity boards (SEBs) is the problem contributing to NPAs.

5. There is constant rotation of duties among bank officers and hence the loan
officers attain diminished level of expertise in lending principles and end up lending
to doubtful customers.

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6. Crony capitalism is also a factor contributing to the NPAs. Banks provide loans for
certain stressed sectors under political pressure.

7. Earlier a proper bankruptcy law was missing. Hence, sick companies faced
seemingly insurmountable exit barriers leading to accumulation of bad loans.

8. The banks have been diversifying its disbursal of funds to unrelated businesses.

9. There have been lapses due to lack of diligence and at times they have led to
fraudulent transactions.

10. The companies have suffered serious losses due to changes in business/regulatory
environment.

11. Some experts also point out the factor of lack of morale amongst banking staff
(especially after government schemes which had written off loans).

12. Other factors attributed are global, regional or national financial crisis. Such crisis
results in deterioration of margins and profits of companies. In this scenario, the
balance sheets of companies are stressed out leading to non-servicing of interest
and loan payments. For example, the 2008 global financial crisis catalysed the
stressing out of balance sheet of various companies and they were unable to pay
back loans.

13. There were many scams which were unearthed after 2011 which led to anti-
corruption agitations. That was also the period of policy paralysis leading to general
slowdown of entire economy which resulted into losses for various companies
catalysing the rapid growth of the NPAs. There were problems related to land
acquisition, environmental regulations etc. due to which many infrastructure
projects started languishing resulting into losses. The slowdown in industrial activity
also paralysed the loan repayment ability of various companies contributing to
overall NPA problem.

14. The NPA problem also resulted because of unplanned expansion of corporate
houses during boom period of the economy. These corporate houses got loan at
low rates which were later serviced at high rates contributing to NPAs.

15. Lack of Corporate Governance: Corporate houses also undertake unethical

business practices which is exemplified by the phenomenon of wilful defaulters who
run away from India after not paying crores of rupees taken as loan amount earlier.

16. There are serious issues related to mis-governance and policy paralysis which hinder
the timely completion of projects especially in the infrastructure sector. In this
scenario loans become NPAs. The NPAs have also resulted out of intense
competition in particular market segments like the telecom sector in India.

17. Delays in land acquisition have also contributed to the NPA problem.

18. There have been some bad lending practices lacking in transparency adopted by
the banks which have contributed to their rising share of NPAs.

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19. Some companies have also been facing losses due to dumping by foreign nations.
For example, the steel sector in India has been faced with losses due to cheap
imports as a result of dumping leading to business losses for domestic companies
magnifying their stressed assets leading to NPA problem.

Impact of NPAs

1. Banks suffer from reduction in their profit margins which corrodes the health of
banking system.

2. If the banking sector is stressed out then less money is available to fund other
projects leading to a larger negative impact on the larger national economy.

3. Banks resort to charging higher interest rates to maintain their profit margin. This
leads to losses for corporate houses.

4. The NPA problem also results in channelling of funds from the good projects to the
bad ones. This adversely impacts upon the interests of the economy. Various
attractive investment proposals face roadblocks in this scenario leading to
substantial unemployment.

5. The NPA problem is particularly bad in the case of public sector banks. If these
banks are afflicted with the serious NPA problem then there is a loss for
shareholders. It means that the Government of India gets less money as dividend.
Hence, in the larger frame of things it may adversely impact redirection of public
money for socio-economic purposes and infrastructure development. Various other
investors/shareholders also do not get rightful returns on their investment.

6. Twin Balance Sheet challenge: It refers to balance sheet syndrome with Indian
characteristics that is both the banks and the corporate sector have stressed
balance sheet. This leads to various roadblocks in the path of investment-led
development process.

7. The dispute resolution of NPA-related cases magnifies pressure on the judiciary

which is already over-burdened with pending cases.

8. The NPAs create scarcity of funds in the markets adversely affecting the overall
growth performance of the economy.

9. The price of loans, interest rates etc. zoom up badly. As interest rates magnify, it
impacts upon the investors as they face obstacles in taking loans for various
industrial projects.

10. It also adversely affects the retail consumers who get loans at higher interest rates.

11. All these factors have a damaging impact on the overall demand in the Indian
economy leading to subdued growth and higher inflation because of the higher
cost of capital.

Steps to deal with the NPA problem

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NPAs are a serious problem in India. Hence, there have been several steps taken by the
Government of India on legal, financial, policy level reforms concerning the NPA problem.

Earlier in the year 1991, the Narasimhan committee recommended many reforms to tackle
NPAs.

• The committee recommended the establishment of an Asset Reconstruction Fund

(ARF).

• This fund will take over the proportion of the bad and doubtful debts from the banks
and financial institutes. It would help banks to get rid of bad debts.

Following are the list of various steps taken so far for dealing with the NPAs: -

1. The Debt Recovery Tribunals (DRTs) – 1993

2. Credit Information Bureau – 2000
3. Lok Adalats – 2001
4. Compromise Settlement – 2001
5. SARFAESI Act – 2002
6. ARC (Asset Reconstruction Companies)
7. Corporate Debt Restructuring – 2005
8. 5:25 rule – 2014
9. Joint Lenders Forum – 2014
10. Mission Indradhanush – 2015
11. Strategic debt restructuring (SDR) – 2015
12. Asset Quality Review – 2015
13. Sustainable structuring of stressed assets (S4A) – 2016
14. Insolvency and Bankruptcy code Act-2016
15. Pubic ARC vs. Private ARC – 2017
16. Recapitalisation of PSBs
17. Amendment in Banking Regulation Act, 1949 in 2017

The P.J. Nayak committee report and Indradhanush plan have batted for Banking Board
Bureau and governance reforms. These are measures meant to strengthen the banking
system but they are lagging behind which is causing lack of clarity of direction.

The Economic Survey 2016-17 says that NPAs are “an economic problem, not a morality
play”. Hence, pragmatism has to be the hallmark of dealing with the vexed issue of the
NPAs.

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