What is an NPA?
A Non-Performing Asset refers to a classification for loans on the books of financial institutions that are in default or are in arrears on scheduled payments of principal or interest. In most cases, debt is classified as nonperforming when loan payments have not been made for a period of 90 days.
According to RBI, terms loans on which interest or instalment of principal remains overdue for a period of more than 90 days from the end of a particular quarter is called a Non-performing Asset. However, in terms of Agriculture / Farm Loans, the NPA is defined as under, for short duration crop agriculture loans such as paddy, Jowar, Bajra etc. if the loan (instalment/interest) is not paid for 2 crop seasons, it would be termed as an NPA. For Long Duration Crops, the above would be 1 Crop season from the due date.
Non-Performing Assets which are notoriously called as NPA’s by the banking sector have become a pain for both public and private sector banks in India.
The possible reasons for NPAs are addressed below:
1. Diversification of funds to unrelated business/fraud.
2. Lapses due to diligence.
3. Business losses due to changes in business/regulatory environment.
4. Lack of morale, particularly after government schemes which had written off loans.
5. Global, the 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).
6. The general slowdown of the entire economy for example after 2011 there was a slowdown in the Indian economy which resulted in the faster growth of NPAs.
7. The slowdown in a specific industrial segment, therefore, companies in that area bear the heat and some may become NPAs.
8. 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.
9. Due to mal-administration by the corporates, for example, willful defaulters.
10. Due to misgovernance and policy paralysis which hampers the timeline and speed of projects, therefore, loans become NPAs. For example the Infrastructure Sector.
11. Severe competition in any particular market segment. For example the Telecom sector in India.
12. Delay in land acquisition due to social, political, cultural and environmental reasons.
13. A bad lending practice which is a non-transparent way of giving loans.
14. Due to natural reasons such as floods, droughts, disease outbreak, earthquakes, tsunami etc.
15. Cheap import due to dumping leads to business loss of domestic companies. For example the Steel sector in India.
How could it impact?
1. Lenders suffer a lowering of profit margins.
2. Stress in banking sector causes less money available to fund other projects, therefore, negative impact on the larger national economy. Higher interest rates by the banks to maintain the profit margin.
3. Redirecting funds from the good projects to the bad ones.
4. As investments got stuck, it may result in it may result in unemployment.
5. In the case of public sector banks, the bad health of banks means a bad return for a shareholder which means that the government of India gets less money as a dividend. Therefore it may impact easy deployment of money for social and infrastructure development and results in social and political cost.
6. Investors do not get rightful returns.
7. Balance sheet syndrome of Indian characteristics that is both the banks and the corporate sector have stressed balance sheet and causes halting of the investment-led development process.
8. NPAs related cases add more pressure to already pending cases with the judiciary.
Present Condition of NPAs:
The share of gross NPAs in total advances of banks, both in the public and private sector, peaked in March 2018 and has declined in both the June and September quarter of the year 2018-19. The NPA crisis is more widespread in the public sector banks.
A Reserve Bank of India (RBI) note based on unaudited financial statements of Scheduled Commercial Banks (SCBs) suggests that the worst of the non-performing assets (NPA) crisis facing India’s banks might be over and that credit growth may also be back.
The report also says that annualized slippage ratio percentage of fresh NPAs a percentage of standard NPAs has also shown a decline in the last two quarters. To be sure, the share of NPAs in total advances is still much higher than what it was before the RBI forced banks to implement Asset Quality Review (AQR) in December 2015. The AQR is thought to stop the practice of making additional provisions to what were already stressed loans.
The Indian economy has been suffering from a vicious/dangerous cycle of low demand and supply for capital due to the NPA crisis. Banks were unable to lend because their capital was caught in bad loans. And firms were unwilling to borrow because of an already existing loan burden. The Economic Survey had termed this as the “twin balance sheet” problem a couple of years ago.
The latest numbers on the declining the share of NPAs in last 2 quarters, when reading together with capital formation and credit growth statistics, also point towards a cyclical recovery of the investment cycle in the Indian economy. Both these indicators show a restoration in the recent period, which suggests that there is a recovery in investment demand in the economy.
While these developments are good news on the macro front from a growth perspective, they could also mean a tightening of the inflation scenario. Given the fact that non-food inflation in the economy has been consistently high at 12.56%, it could build the case for a hike in lending rates by RBI in the near future.
– M Rohith Eswar Kumar
GBS FINANCE 