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  • What is NPA?
  • Impact of NPA on economy
  • Reasons for the rise in NPA in recent years
  • Why most NPA in Public sector?
  • Steps taken by RBI and Government in last few years to curb NPA
  • How to curb the menace of NPA

source

According to RBI’s recent data, the gross non-performing assets (NPAs) of public sector banks are just under Rs 4 lakh crore, and they collectively account for 90 percent of such rotten apples in the country’s banking portfolio.

In terms of net NPAs, their share is even higher – at 92 percent of the total bad loans reported so far in the banking system. The total NPAs of Indian banks, as a percentage of the total loans, has grown from 2.11 per cent(2008) to 5.08 percent(2016).

In this article we will explain what is NPA, The reason why NPA increased in India and steps taken by Government in recent years to curb the menace of NPA and what else needs to be done.

What is NPA?

  • The assets of the banks which don’t perform (that is – don’t bring any return) are called Non Performing Assets (NPA) or bad loans. Bank’s assets are the loans and advances given to customers. If customers don’t pay either interest or part of principal or both, the loan turns into bad loan.
  • According to RBI, terms loans on which interest or instalment of principal remain 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 (installment / interest) is not paid for 2 crop seasons, it would be termed as a NPA. For Long Duration Crops, the above would be 1 Crop season from the due date.
source

Impact of NPA on Economy

The problem of NPAs in the Indian banking system is one of the foremost and the most formidable problems that had impact the entire banking system. Higher NPA leads to following adverse impact on Economy:

  1. Depositors do not get rightful returns and many times may lose uninsured deposits. Banks may begin charging higher interest rates on some products to compensate Non-performing loan losses
  2. Bank shareholders are adversely affected
  3. Bad loans imply redirecting of funds from good projects to bad ones. Hence, the economy suffers due to loss of good projects and failure of bad investments
  4. When bank do not get loan repayment or interest payments, liquidity problems may ensue.

Reasons for the rise in NPA in recent years

  • GDP slowdown: Between early 2000’s and 2008 Indian economy were in the boom phase. During this period Banks especially Public sector banks lent extensively to corporates. However, the profits of most of the corporate dwindled due to slowdown in the global and domestic economy, bans in mining projects, delays in environmental related permits ,Land acquisition hurdles and volatility in prices of raw material. This has adversely affected their ability to pay back loans and is the most important reason behind increase in NPA of public sector banks.
  • Relaxed lending Norms: One of the main reasons of rising NPA was the relaxed lending norms especially for corporate honchos when their financial status and credit rating was not analyzed properly. Also, to face competition banks were hugely selling unsecured loans .
  • Priority Sector Lending: There is a myth that main reason for rise in NPA in Public sector banks was Priority sector lending as according to the findings of Standing Committee on Finance , NPAs in the corporate sector are far higher than those in the priority or agriculture sector. However, even if PSL is not the main cause but it is still a cause for rising NPA which can be seen from the fact that As per the latest estimates by the SBI, education loans constitute 20% of its NPAs.
  • The Lack of Bankruptcy code in India and sluggish legal system makes it difficult for banks to recover these loans from both corporate and noncorporate.

Other factors

  • Banks did not conducted adequate contingency planning, especially for mitigating project risk. They did not factor eventualities like failure of gas projects to ensure supply of gas or failure of land acquisition process for highways.
  • Restructuring of loan facility was extended to companies that were facing larger problems of over-leverage & inadequate profitability. This problem was more in the Public sector banks.
  • Companies with dwindling debt repayment capacity were raising more & more debt from the system.

Why most NPA in Public sector?

  • Five sectors Textile, aviation, mining, Infrastructure contributes to most of the NPA, since most of the loan given in these sector are by PSB, they account for most of the NPA.
  • Public Sector banks provide around 80% of the credit to industries and it is this part of the credit distribution that forms a great chunk of NPA. Last year, when kingfisher was marred in financial crisis, SBI provided it huge amount of loan which it is not able to recover from it.
  • Less Professional management
  • Political Pressure and interference forces PSB to lend to not so commercially sounds project.

Steps taken by RBI and Government in last few years to curb NPA

  • Government has launched Mission Indradhanush to make the working of public sector bank more transparent and professional in order to curb the menace of NPA in future.
  • Government has also proposed to introduce Bankruptcy code which will make it easier for banks to Recover the loans from the debtors.
  • RBI introduced number of measures in last few years which include:
    • Tightening the Corporate Debt Restructuring (CDR) mechanism,
    • Setting up a Joint Lenders’ Forum, prodding banks to disclose the real picture of bad loans, asking them to increase provisioning for stressed assets,
    • Introducing a 5:25 scheme where loans are to be amortized over 25 years with refinancing option after every five years, and
    • Empowering them to take majority control in defaulting companies under the Strategic Debt Restructuring (SDR) scheme.

How to curb the menace of NPA?

#1. Short Term measures

  • Review of NPA’S/Restructured advances- We need to assess the viability case by case. Viable accounts need to be given more finance for turnaround and unviable accounts should either be given to Asset Reconstruction Company or Management/ownership restructuring or permitting banks to take over the units.
  • Bankruptcy code should be passed as soon as possible. Bankruptcy code will make it easier for banks to recover loans from unviable enterprises.
  • Government should establish ARC with equity contribution from the government and the Reserve Bank of India (RBI). The established ARC should take the tumor (of non-performing assets or NPAs) out” of the banking system. An ARC acquires bad loans from banks and financial institutions, usually at a discount, and works to recover them through a variety of measures, including sale of assets or a turnaround steered by professional management. Relieved of their NPA burden, the banks can focus on their core activity of lending.

#2. Long term Measures

  • Improving credit risk management– This includes credit appraisal, credit monitoring, and efficient system of fixing accountability and analyzing trends in group leverage to which the borrowing firm belongs to
  • Sources/structure of equity capital– Banks need to see that promoter’s contribution is funded through equity and not debt.
  • Banks should conduct necessary sensitivity analysis and contingency planning while appraising the projects and it should built adequate safeguards against such external factors.
  • Strengthen credit monitoring– Develop an early warning mechanism and comprehensive MIS(Management information system) can play an important role in it.MIS must enable timely detection of problem accounts, flag early signs of delinquencies and facilitate timely information to management on these aspects.
  • Enforce accountability- Till now lower ring officials considered accountable even though loaning decisions are taken at higher level. Thus sanction official should also share the burden of responsibility.
  • Restructured accounts should treated as non performing and technical write offs where Banks remove NPA’S from their balance sheets Permanently should be dispensed with.
  • Address corporate governance issues in PSB- This includes explicit fit and proper criteria for appointment of top executives and instituting system of an open market wide search for Chairman.

References:

Any doubts?


  1. Rupesh Mandal

    nice article

  2. Anirudh Aggarwal

    Please update the explained page with the following changes:

    1. Bankruptcy law
    2. DRT amendment passed
    3. S4A scheme
    4. Peer to peer lending norms releases by RBI

    This will make the article up to date and more comprehensive.

  3. Naveen Shekhar

    ‘Loans are to be amortized’ means?
    Anybody please explain.

  4. Solai Perumal

    all things useful,
    yesterday i read about NPA ,
    u gave quentions in terms of mains prespective which was very useful, but I request u to give perdictable question in terms of prelims prespective also for npa and all other topics

    1. Anirudh Aggarwal

      questions for pre can are easily available. however, CD is providing questions for mains which aren’t easily available.

    2. Focus Ias

      NPA usually has very simple questions from pre perspective.

  5. Yogesh Pratap Singh

    helpful

  6. Root

    Updated with Explainer & Questions to help you understand the issue in full.

  7. Sheethal Gurram

    sir can u please explain the clear cut story of NPA and its crisis

  8. TEJ. G

    Can any body throw some light on why payment bank was given the permission to open the bank baranches also ,I mean their most of the transactions was meant through internet only — also the aim is -JAM -acc to eco survey where in Mobile will help to penetrate banking services and that was the logic behind the payment banks other wise small banks was enough to do the same .I am not able to under stand this logic .Who will invest in branches (the than post office ) for collecting the money only ….pls throw some lights friends

  9. Leenika Sharma

    Sir in hindu article ….. “the proposal seeking an’ in principal’ approval to start negotiations with assosiate banks willl be submitted to the cen. Govt … ” …..
    My doubt is what that’ in principal’ means …?????

  10. Abhishek Sharma

    Is PSL the real problem behind NPAs? in this Hindu article Committee at one place says that PSL does not apply to private banks??
    But it applies to all Indian banks equally right?? Infact foreign banks have to around 32%.
    Kindly explain

    1. Kartikeya Singh

      Noting that Private Sector Banks and Foreign Banks have 2.2 per cent non-performing assets whereas the Public Sector Banks have 5.98 per cent NPAs, the PAC felt “it is hard to believe that the difference is only due to the PSL ”.
      So, in this statement , it clearly says how PL cannot be the sole cause as both private and public banks are subjected to it. Had that been the case, then the condition of Private banks would be very bad too..

      1. Abhishek Sharma

        You sure man? Because they implied that PSL does not apply to private banks. I have not gone through the budget yet. Going through Mrunal videos right now.. So thought may be they have changed it in this budget..
        Thanks for explaining.

        1. Dr V

          PSL Norms apply across the board but in othe social endeavours like Jan dhan accounts, social insurance etc pvt sector tend to go slow and public sector banks have to pick up the tab

          1. Dr V

            Yes. You can say so. As govt holds majority states, govt as an owner is bound to direct major policy decisions. And it’s not illegitimate either.

          2. Abhishek Sharma

            They have to pick up the tab because govt. is in board of directors for public sector banks.. right? I mean what else is the incentive?
            BTW Dr V.. You still active here.. I thought you would be somewhere in Kasol.. Celebrating..
            Congratulations Dr

  11. Debodyuti Dutta

    Could not properly understand the news card “Provision for fraud within 4 quarters: RBI”. someone plz elaborate.

RBI new bad loan rules may improve prospects of loan recovery

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Strategic debt restructuring, S4A scheme

Mains level: Measures taken by RBI to tackle NPA problem


News

More stringent laws for resolution of stressed loans

  1. The Reserve Bank of India has withdrawn a host of norms such as strategic debt restructuring (SDR) and scheme for the sustainable structuring of stressed assets (S4A)
  2. It has also made the process time-bound
  3. The new rules stipulate that starting 1 March, lenders must implement a resolution plan within 180 days for accounts of at least Rs2,000 crore

Impact of new rules

  1. The revised rules which call for credit rating agencies to evaluate resolution plans will make the process of restructuring more transparent
  2. They will enable lenders to get better market-linked pricing for the underlying asset
  3. They would also sync bank balance sheets with expected loss from the stressed asset pool
  4. The new rules will improve recovery rates because the failure in meeting timeline will lead to insolvency proceedings, which has to be completed in a maximum of 270 days

Back2Basics

Strategic Debt Restructuring

  1. Under SDR, banks who have given loans to a corporate borrower gets the right to convert the full or part of their loans into equity shares in the loan taken company
  2. The SDR gives banks more power in the management of the company who has taken loan and has defaulted
  3. The SDR scheme which was introduced by the RBI in June 2015 thus helps banks recover their loans by taking control of the distressed listed companies
  4. The SDR initiative can be taken by the group of banks or JLF that have given loans to the particular defaulted entity
  5. The Joint Lender Forum (JLF) is a committee comprised of the entire bankers who have given loans to a potentially stressed or stressed borrower

Scheme for the sustainable structuring of stressed assets (S4A)

  1. The S4A Scheme aims at deep financial restructuring of big debted projects by allowing lender (bank) to acquire equity of the stressed project
  2. It is intended to restore the flow of credit to critical sectors including infrastructure
  3. The scheme allows banks to rework stressed loans under the oversight of an external agency
  4. For an account to be eligible for restructuring under the S4A Scheme, the total loans by all institutional lenders in the account should exceed Rs 500 crore (including rupee loans, foreign currency loans/external commercial borrowings)
  5. The project should have started its commercial operations and there should be cash flows from the project

‘SBI wrote off bad loans worth more than Rs. 20,000 crore last fiscal’

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Writing off bad loans is a part of NPA crisis.


News

Bad Loans: Wrote off

  1. The SBI wrote off bad loans worth Rs. 20,339 crore in 2016-17, the highest among all public sector banks
  2. The data pertains to the period when the associate banks of State Bank of India (SBI) were not merged with it

Data on ‘writing off’ by other banks

  1. All PSBs had a collective write-off of Rs. 81,683 crore for the fiscal 2016-17
  2. Public sector banks’ (PSBs) write-offs stood at Rs. 27,231 crore in 2012-13, government data showed

The ‘writing off’ figures has jumped almost threefold in five years

  1. In 2013-14, state-owned banks wrote off bad loans worth Rs. 34,409 crore; Rs. 49,018 crore in 2014-15; Rs. 57,585 crore in 2015-16, hitting Rs. 81,683 in the fiscal ended March 2017
  2. In the current financial year, PSBs have written off loans worth Rs. 53,625 crore in the six months to September

Back2basics

What is writing off bad loans?

  1. Banks prefer to never have to write off bad debt since their loan portfolios are their primary assets and source of future revenue
  2. However, toxic loans—loans that cannot be collected or are unreasonably difficult to collect—reflect very poorly on a bank’s financial statements and can divert resources from more productive activity
  3. Banks use write-offs, which are sometimes called “charge-offs,” to remove loans from their balance sheets and reduce their overall tax liability

[op-ed snap] Three ways to minimize power sector NPAs

Note4students

Mains Paper 3: Economy | Infrastructure: Energy, Ports, Roads, Airports, Railways etc.

From UPSC perspective, the following things are important:

Prelims level: S4A, PPAs, Shakti scheme, etc.

Mains level: The UPSC is known to ask questions on infrastructure topic of the syllabus.


News

What is the issue?

  1. Around 51 gigawatt (GW) of thermal capacity is stressed because of a number of reasons like the non-availability of coal
  2. A further around 23 GW of capacity under construction is also potentially stressed
  3. That’s tantamount to around Rs4 trillion of debt under stress and potential NPAs

Are the schemes for sustainable structuring of stressed assets (S4A) helping?

  1. These schemes provide limited relief to banks by changing the capital structure and postponing the problem of poor potential cash flows
  2. But there is a lack of offtake and lack of power purchase agreements (PPAs) and availability of coal

The issue of offtake

  1. Discoms have shied off power purchase agreements (PPAs)—the last one was in 2016 in Uttar Pradesh for 3,800 megawatt power, only to be cancelled later
  2. They have preferred to buy power through short-term contracts or the open market, given subdued offtake and prices, and significant capacity addition in the past five years
  3. Consequently, many generators have been selling electricity at throwaway prices or have switched off plants, leading to defaults on financial covenants
  4. And with the increasing thrust on renewable energy and clean energy, the procurement of thermal power has tapered
  5. The perceived surplus—of generation outpacing demand—is a chimera because on the other side you have load-shedding by discoms
  6. The truth is, discoms aren’t buying enough because of poor financials, and not because demand is low

Issues related to coal supply

  1. The absence of fresh coal linkages (none since 2010), restrictions on the use of linkage fuel, and cancellation of coal mines without alternative arrangements have hit thermal plants
  2. Another fell blow—for private sector producers this time—is the rider that only long-term PPA holders can get linkage
  3. And the response to the past five rounds of coal auctions has been tepid, with the last one (or Tranche V) even getting cancelled
  4. Of the 72 coal blocks auctioned and allotted so far, only a handful have started operations
    Government’s efforts
  5. The scheme for harnessing and allocating koyla (coal) transparently in India, or SHAKTI was successful, with a total booking of around 27.18 million tonnes of coal per annum from eight available sources
  6. Under the scheme the government provides coal linkage to developers
  7. This was, however, a limited scheme and will need to be extended

What should be done?
FIRST

  1. Stricter regulations are necessary to discourage load-shedding by discoms and to ensure quality, universal power supply to meet the 24×7 goal
  2. This will help capture the actual demand and force discoms into competitive bidding to buy power

SECOND

  1. The issue of non-signing of PPAs by discoms can be solved through centralized procurement and allocation of capacity to states, as has been done in renewables

THIRD

  1. Along with centralized procurement, the government should consider a SHAKTI scheme (second round) for constructed plants without fuel linkage
  2. So that they can actively participate given the comfort of fuel source

The way forward

  1. hese steps can help minimize NPAs and haircut levels for banks
  2. And also provide a signal to new investors who haven’t put money into the conventional power sector for more than three years

Indian Banks’ Association may set up online platform to sell bad loans

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Particulars of the IBA

Mains level: The proposed platform can help in countering the NPA crisis


News

Online trading platform by Indian Banks’ Association (IBA)

  1. The Indian Banks’ Association (IBA) is examining the possibility of setting up an online trading platform to sell bad loans
  2. Why: to improve price discovery and market liquidity.
  3. The IBA will prepare a discussion paper as well as consult with all stakeholders including asset reconstruction companies (ARCs) and banks

It was a suggestion by the RBI

  1. RBI had urged banks and ARCs to collaborate for setting up an online trading platform for selling bad loans as it would help develop such a market

Why is this platform important?

  1. According to industry experts, an online platform can double up as a bidding platform, where live auctions can be conducted, with options for the bidder to remain anonymous
  2. This can improve the sale valuation, especially in the current scenario where banks are selling large bad loans against the earlier preference for off-loading old NPAs

Back2basics

Indian Banks’ Association

  1. Indian Banks’ Association (IBA), formed on 26 September 1946 as a representative body of management of banking in India operating in India – an association of Indian banks and financial institutions based in Mumbai
  2. With an initial membership representing 22 banks in India in 1946, IBA currently represents 237 banking companies operating in India
  3. IBA was formed for development, coordination and strengthening of Indian banking, and assist the member banks in various ways including implementation of new systems and adoption of standards among the members
  4. Indian Banks’ Association is managed by a managing committee, and the current managing committee consists of one chairman, 3 deputy chairmen, 1 honorary secretary and 26 members
  5. Current chief executive is V G Kannan. He succeeds M V Tanksale who demitted office as Chief Executive on August 9, 2016, after being at the helm for three years

Govt seeks Parliament nod for Rs80,000 crore recap bonds

Image source

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Government securities, bank recapitalisation plan, NPA

Mains level: Rising NPA in banking system and measures being taken by government for their resolution


News

Additional spending for bank recapitalisation

  1. The government has sought Parliament’s nod for an additional spending of Rs 80,000 crore for capitalizing state-run banks through issue of government securities
  2. This expenditure will be met through enhanced receipts indicating that this additional expenditure will not impact fiscal deficit

Why this demand?

  1. Last year, the finance ministry had announced a Rs2.11 trillion bank recapitalisation plan for state-owned lenders looking to boost bank balance sheets hit by rising bad loans
  2. This was done to ensure flow of credit to important sectors of the economy

Structure of recapitalisation

  1. Out of Rs2.11 trillion, Rs1.35 trillion was to come from the sale of so-called recapitalisation bonds and the remaining Rs76,000 crore through budgetary allocation and fund-raising from the markets

Banks under NPA pressure

  1. Indian banks are weighed down by stressed assets of close to Rs10 trillion
  2. Of this, gross non-performing assets (NPAs) account for Rs7.7 trillion and the rest are restructured loans

Back2Basics

Government securities

  1. A Government security is a tradable instrument issued by the Central Government or the State Governments
  2. It acknowledges the Government’s debt obligation
  3. Such securities are short-term (usually called treasury bills, with original maturities of less than one year)
  4. Or long-term (usually called Government bonds or dated securities with original maturity of one year or more)
  5. In India, the Central Government issues both, treasury bills and bonds or dated securities
  6. The State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs)
  7. Government securities carry practically no risk of default and, hence, are called risk-free gilt-edged instruments

[op-ed snap] Testing times

Image Source

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Twin balance sheet problem

Mains level: The newscard presents current condition of the NPA crisis in the Indian Banking System.


News

Actions against Twin Balance Sheet problem are not giving desired results

  1. The Central government has been working hard to address India’s twin balance sheet problem, but it hasn’t had much to show in the form of results
  2. The Financial Stability Report released by the RBI, suggests that India is still far away from solving the troubles ailing its banks and large business corporations

Financial Stability Report: RBI’s Report

  1. According to the report released, gross NPAs in the banking system as a whole rose to 10.2% at the end of September, from 9.6% at the end of March
  2. This, according to a research report released by CARE Ratings, puts India fifth among significant economies with the most NPAs
  3. The RBI stated further that it expects NPAs to continue to rise to as high as 11.1% of total outstanding loans by September 2018

Condition of Private Sector banks and Non-Banking Finance Companies(NBFCs)

  1. The bad loans problem has also not spared private sector banks
  2. These lenders have seen their asset quality deteriorate at a faster pace than public sector banks
  3. Non-banking financial companies that compete against banks also saw a jump in NPAs

Is there any real hope?

  1. The resolution of bankruptcy cases
  2. Particularly against large borrowers that contribute a major share of bank NPAs, under the new Insolvency and Bankruptcy Code should help bring the NPA situation under some control
  3. Despite its many imperfections and the slow pace of resolutions by the National Company Law Tribunal, the Code can be helpful in cleaning up bank books in future credit cycles

Recapitalisation of public sector banks and Bad Debt resolution are not enough

  1. Bad debt resolution and recapitalisation are only part of the solution
  2. As they can do very little to rein in reckless lending that has pushed the Indian banking system to its current state

Suggestion by the IMF

  1. The government should accept the recent advice of the International Monetary Fund to reduce its ownership stake in banks and give greater powers to the RBI to regulate public sector banks efficiently
  2. Structural reforms are the only long-term solution

Back2basics

Twin balance sheet problem

RBI Financial Stability Report shows rising stress in agriculture and industry

Image source

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: RBI Financial Stability Report,  Special Mention Account (SMA), NPA

Mains level: NPA problem of banks


News

Stressed loans in agriculture increase

  1. RBI Financial Stability Report states that stressed loans to agriculture have risen since March 2017
  2. Stressed loans now account for almost a quarter of banks advances to industry

Situation of other sectors

  1. Stress has increased in infrastructure, engineering, food processing and construction sectors
  2. Stressed assets are coming down in the services sector

Bad loans

  1. The accretion of bad loans in September quarter was the slowest in almost 10 quarters for banks
  2. Many lenders also showed improvement in bad loan ratios

Does this mean bad loan crisis is over?

  1. Large borrowers are still unable to meet loan repayment commitments and banks are still deeply mired in the bad loan mess
  2. Stressed companies still aren’t able to generate enough revenue to honour loan payments

Special mention accounts

  1. Before a loan account turns into an NPA (Non-performing asset), banks are required to identify incipient stress in the account by creating three sub-categories under the Special Mention Account (SMA) category
  2. Between March and September, SMA-2 loan accounts, cases where principal and interest payments are overdue for more than 60 days, surged by 56%
  3. There is a concurrent drop of 40% in SMA-1 accounts, where payment overdue is more than 30 days

NPAs, balance sheet repair testing banking resilience: International Monetary Fund

Note4students

Mains Paper 2: IR | Important International institutions, agencies & fora, their structure, mandate

From UPSC perspective, the following things are important:

Prelims level: IMF, FSAP, FSSA, GDP

Mains level: Vulnerability of PSBs and related issues


News

India’s financial sector is facing considerable challenges

  1. With high non-performing assets and repair of corporate balance sheets testing the resilience of the banking system, India’s financial sector is facing considerable challenges
  2. This is also holding back investment and growth
  3. This was said in International Monetary Fund’s Financial Sector Assessment Programme (FSAP) report

Financial System Stability Assessment (FSSA)

  1. The last FSSA for India was done in 2011
  2. It is conducted jointly by a team of the IMF and the World Bank
  3. The FSAP aims at having a very comprehensive and in-depth view of the financial system in countries with big systemic financial systems
  4. The FSAP took stock of the considerable progress made in strengthening financial sector oversight and identified areas where scope for further improvement remains

Public sector banks vulnerable

  1. Stress tests show that a group of public sector banks (PSBs) are highly vulnerable to further declines in asset quality and higher provisioning needs
  2. Capital needs range from 0.75 percent of GDP in the baseline to 1.5 percent of GDP in the severe adverse scenario

Role of state

  1. The state retains an important footprint in the system via ownership of large financial institutions, captive government financing, and directed credit to priority sectors
  2. It has also taken measures like strengthening the RBI’s de jure independence, expanding other financial regulators’ resources, introducing a risk-based solvency regime and extending risk-based supervision for insurers; and unifying the oversight of commodities markets

[op-ed snap] Reveal, recognise, resolve

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: IFRS 9, IBC, IBBI, etc.

Mains level: The article discusses important solutions for the ongoing NPA problems.


News

Why Indian banks recover very little of their bad loans?
Some Theories

  1. The first suggests something cultural about repayment intentions of Indian borrowers
  2. The second theory suggests that many big bank loans are a child of political connections; this smells right
  3. The third theory suggests that many large Indian projects are gold-plated; indeed, many seem to have spent more money than needed
  4. The fourth theory suggests that Indian banks have not really been making loans but equity masquerading as debt
  5. The fifth theory, probably the most important, suggests the lack of a speedy and decisive bankruptcy process became an unfair advantage for large borrowers

How will “revealing, recognising and resolving” enable higher future recovery rates and lower future incidence of bad loans?
First: Resolving

  1. The Insolvency and Bankruptcy Code (IBC), a competent Insolvency and Bankruptcy Board (IBBI)
  2. And Bank IBC filings mean that Rs 3 lakh crore loans are under resolution
  3. The recent decision(that no defaulter can bid) on eligibility for bidders was important because of the practically non-existent track record of repeated in-situ restructurings

Second: Recognising

  1. India is one of the 160 countries to sign up IFRS
  2. It is a new international accounting standard born of the policy feeling that banks recognised bad loans too little and too late in the global financial crisis

Three: Revealing

  1. Banks, globally, improve recovery rates by “calling” loans (all future payments become due) immediately after the disclosure of payment misses or lower-case defaults
  2. Benefit: Revealing defaults forces open lines of communication, enables good faith negotiation between borrowers and lenders, and shrinks the extended bankruptcy periods that destroy value
  3. A good bankruptcy regime does not aim for liquidation but motivates a speedy renegotiation of financial viability

Preventive measures by the RBI

  1. Current bankruptcy policy changes are appreciated
  2. But these changes are complemented with preventive measures from the RBI like
    (1) capping exposures to companies and sectors,
    (2) disclosing provisioning divergence,
    (3) prompt correction action framework,
    (4) a central repository of information on large credits (CRILIC),
    (5) and a mandatory legal entity identifier in CRILIC for all borrowers of more than Rs 1,000 crore by March 2018 and more than Rs 50 crore by December 2019

Two areas need more work

  1. Governance at public-owned banks
  2. Revealing defaults: revealing defaulters needs reconciling conflicting legal, regulatory, liquidity, privacy, and fairness questions
  3. But automatic, immediate and universal disclosure should be a goal

The way forward

  1. India’s Rs 10 lakh crore bad loans are also a child of the breathless bank loan expansion from Rs 18 lakh crore to Rs 52 lakh crore in the six years before 2014
  2. A banking system that recovers its loans is an important part of India’s infrastructure of opportunity. The contours of this system are emerging.
  3. The contours of this system are emerging

Bad loans of private banks also spurt, keep pace with PSU counterparts

Note4Students

 Mains Paper 3: Indian Economy and issues relating to planning, mobilization of resources, growth.

Prelims: RBI, NPAs.

Mains level: The news card talks about the rising NPAs in private banks and also about several instances of under-reporting, divergence of actual bad loans by private banks.


News

Context

Rise of NPAs in private banks

  1. Private banks have reported a massive rise in bad loans in the last five years, in a sign that they are not far behind their public sector counterparts when it comes to stressed assets in the banking system.
  2. The rise in NPAs of private banks is as steep as their PSU counterparts.
  3. Private banks also have exposure in many of the highly leveraged and stressed corporates, especially steel, infra and telecom.

The Statistics

  1. Gross non-performing assets of private banks soared to Rs 100,481 crore at the end of September 2017 against Rs 22,020 crore in September 2013, a rise of 356 per cent.
  2. During the 12 month ended September 2017, 12 private banks have added another Rs 30,000 crore to the NPA list.
  3. State owned banks also showed a similar trend.
  4. Gross NPA ratio of 12 private banks, when combined, have increased from 3.5 per cent of total advances in September 2016 to 4.3 per cent in September 2017.
  5. The spurt in NPAs happened in the last two years.
  6. There’s a belief that only PSU banks were reporting huge NPAs. It’s not true. The stress in the banking sector is across the board.
  7. The banks were supposed to clean up their balance sheets by March 2017.
  8. According to Care Ratings, private banks set aside around Rs 33,000 crore towards provisions and contingencies in the last five years.
  9. However, the divergence, of NPAs announced by private banks has raised concerns about the classification of loans.

Under-reporting of NPAs by private banks

  1. This is at a time when the Reserve Bank of India (RBI) unearthed several instances of under-reporting, or divergence, of actual bad loans by private banks.
  2. For Example- Yes Bank reported NPAs of Rs 2,018.6 crore, bad loans as assessed by the RBI were Rs 8,373.8 crore, showing a divergence of Rs 6,355 crore for the fiscal 2017.
  3. The RBI’s assessment of NPAs is yet to come to us. It will be disclosed in the next quarter.
  4. For FY 2016, three private banks had reported divergences worth Rs 18,760 crore.
  5. If the RBI detects more under-reporting of NPAs in fiscal 2018, private banks’ contribution will increase further.
  6. Concerned over the impact of hidden real NPAs on share valuations, the Securities and Exchange Board of India (Sebi) had recently asked listed banks to make disclosures if the provisioning and NPAs assessed by the RBI had exceeded 15 per cent of their published financials.
  7. Market valuations of banks which showed divergence had taken a hit.
  8. The Sebi directive came after the RBI issued a circular asking banks to disclose divergence in the asset classification and provisioning.

The RBI’s Financial Stability Report says that a severe credit shock is likely to impact capital adequacy and profitability of a significant number of banks.

Stressed companies to delay investment recovery by 2-3 yrs: India Ratings

Note4students

Mains Paper 3: Indian Economy and issues relating to planning, mobilization of resources, growth and development, employment.

 

From UPSC perspective, the following things are important:

Prelims level: Capital Expenditure, EBITDA

Mains level: Resolution of NPAs

 


News

Context-

  1. The article talks about a report by India Ratings limited on the stressed assets scenario in the Indian industry.
  2. Main idea: Stressed corporates could derail the overall investment recovery for another two-to-three years in the wake of moderate consumption demand, global overcapacity and working capital disruptions due to the goods and services tax.
    The main concern expressed by the report is decline in capital expenditure in the Indian industry.

 

What are the findings?

  1. There are 75 stressed corporates who constitute 20 per cent of the total capital expenditure spending over FY12-17.
  2. These corporates are from key investment-linked sectors, such as metals and mining, infrastructure, and power.
  3. The majority of stressed corporates would require another 4-5 years to deleverage (the process of reducing the level of one’s debt by rapidly selling one’s assets) to a sustainable level of 4-5 times from their current leverage of 9-10 times

What are the reasons for stress?

  1. There are pockets of stress within sectors, especially infrastructure, metals and power (particularly thermal) owing to high leverage and weak cash flow.
  2. These sectors witnessed a significant decline in capacity utilisation.
  3. Corporates are likely to show an unwillingness to invest in long-term projects due to muted demand and significant leverage, despite a low interest rate environment.

 

Way forward-

  1. The core sectors need to focus on selling stressed assets and equity infusion in order to make efforts in incurring capital expenditure.

 


Back2basics

  1. Capital Expenditure: Money spent by a business or organization on acquiring or maintaining fixed assets, such as land, buildings, and equipment.
  2. EBITDA: Earnings before interest, tax, depreciation and amortization (EBITDA) is a measure of a company’s operating performance. Essentially, it’s a way to evaluate a company’s performance without having to factor in financing decisions, accounting decisions or tax environments.

 

[op-ed snap] A ‘Sudarshan Chakra’ solution for PSU banks

Note4students

Mains Paper 3: Economy | Indian Economy Issues relating to planning

From UPSC perspective, the following things are important:

Prelims level: Read the attached story

Mains level: The article comprehensively go through the issues related to the NPAs and their possible solution.


News

Context

  1. The scale of the NPA problem at PSU banks is much larger than was thought, and the downturn in the Indian economy has also made the need for corrective measures more urgent
  2. The article talks about the issues related to NPAs in Public Sector Banks

Four “R”s which are said to be the key to solving the problems of the banks
(1) Recognition

  1. The RBI’s asset quality review has revealed that the gross NPA ratio of both public and private sector banks is higher than was earlier thought
  2. But in the PSU banks, it is alarming at about 12%
  3. And this is an underestimate, because it does not include assets that are “stressed” but not yet NPAs

(2) Resolution of problem loans

  1. The Insolvency and Bankruptcy Code (IBC) is a major reform
  2. Once an account is referred by a creditor under the IBC to the National Company Law Tribunal
  3. And is admitted, the powers of the management and the board are transferred to an independent insolvency professional (IP)
  4. The IP then looks for someone willing to take over the project on suitable terms
  5. If no one is willing to take over, or the banks don’t accept the debt reduction implied by the package, the company is simply liquidated
  6. The process changes the incentive structure facing bank managements by giving them a legally sanctified method of determining what is a reasonable haircut(haircut means cut in actual price of the project)
  7. Since the alternative is liquidation, they(bank) should be willing to accept any haircut that gives them more than they would get from liquidation
  8. The process will certainly clean up the books of the banks over the next 12 months or so
  9. But it will also mean acceptance of large losses and a corresponding depletion of capital

(3) Recapitalization

  1.  In 2015, the finance ministry had estimated that the PSU banks needed Rs2.4 trillion of capital
  2. Of this capital Rs1.1 trillion was to come from the market, Rs60,000 crore from retained profits, and the remaining Rs 70,000 crore from the budget
  3. But this is clearly insufficient because the NPA situation has turned out to be much worse than expected
  4. Fitch Ratings has estimated that Indian PSU banks will need as much as Rs4 trillion of capital by end of March 2019 to meet the capital requirements under Basel III
  5. The scope for using public funds to recapitalize the PSU banks can only be judged on the basis of a holistic view of the many other demands for government expenditure
  6. We cannot keep stimulate the economy through increased government expenditure
  7. And without without a clear view of how much of the capital requirement of the PSU banks has to be met from the budget

(4) Reforms

  1. Reforms in PSU banks are expected to make the banks more efficient 
  2. The idea of merging PSBs, is not reform at all
  3. Merging strong banks with other banks will do nothing to improve the average balance sheet
  4. The most important reform will be to reduce the government’s equity to 33% in selected PSU banks
  5. This would allow the stronger PSU banks to raise additional capital from the market, including from possible strategic investors(who could be offered seats on the board)
  6. The inclusion of strategic investors, with representation on the board, may make it easier to raise capital without burdening the budget

The way forward

  1. If the budget is under stress, all PSBs need not be recapitalized to ensure targeted growth in lending
  2. Weak banks that have eroded their capital very substantially should be subjected to the RBI’s “prompt corrective action” discipline
  3. This will allow healthier banks to expand and occupy the lending space created

[op-ed snap] The NPA problem: Lessons from South Korea

Image result for non performing asset

Image source

Note4students

Mains Paper 3: Economy | Mobilization of resources

Once you are done reading this op-ed, you will be able to attempt the below.

“A national asset management agency of the kind South Korea and Malaysia have deployed in the past would be a pragmatic way of dealing with NPAs” Discuss

From UPSC perspective, the following things are important:

Prelims level: Scheme for Sustainable Structuring of Stressed Assets, Strategic Debt Restructuring Scheme, Corporate Debt Restructuring Mechanism

Mains level: NPA problem and solution


News

Context

RBI Financial Stability Report warned that the banking system’s gross bad loan ratio could rise to as high as 10.2% of the total loan book by March 2018 from 9.6% in March 2017.

Reason?

  • After global financial crisis, Indian banks pursued an aggressive lending strategy, without conducting adequate credit appraisal or post-disbursal monitoring

Solutions that have been attempted

  1. SARFAESI Act
  2. Corporate Debt Restructuring Mechanism
  3. Strategic Debt Restructuring Scheme
  4. Scheme for Sustainable Structuring of Stressed Assets or S4A

But all these hardly helped ameliorate the bad loan situation

Pragmatic approach ?

  • Create a national asset management company (NAMC) along the lines of South Korea’s Kamco (Korea Asset Management Corp.) or Malaysia’s Danaharta

Kamco’s  Success

  1. Following the Asian financial crisis, both Kamco and Danaharta played a crucial role in reducing the stressed assets
  2. Besides being highly illiquid, the market for stressed assets had large information asymmetries—sellers possess more information about soured assets than the buyers.
  3. This increases the bid-ask spread and damages the chances of market clearance.
  4. Owing to the absence of information on comparables, the buyers end up paying higher prices for the assets.
  5. This is where Kamco, aided price discovery in the illiquid market by stepping in as the first-mover.
  6. Until mid-1999, Kamco appeared to pay higher prices than average for buying bad loans. Soon after, prices became more realistic, drawing interest from private players in the market for distressed loans. 

National asset management company (NAMC)

  1. An NAMC would take over the NPAs corresponding to projects that are unviable in the short and medium term but may become viable in the longer term.
  2. It would then help discover the right price of those assets by being the first-mover in the market
  3. Another way NAMC could reduce market imperfections would be through leveraging the benefits of structured finance.
  4. By pooling different non-performing assets (NPAs), dividing them into tranches according to their risk profiles, and then selling them to interested investors
  5. NAMC could help generate liquidity in the market. This is because investors would be able to participate according to their risk preferences.

Way forward

  1. Setting up an NPA transaction platform that would act as a central repository of data on stressed assets from participating banks .
  2. This would further enhance liquidity by making transaction data standardized and transparent, allowing investors to take informed decisions.
  3. Creation of an NAMC should come with a “sunset clause”. After a predefined period, when the company’s operations are no longer deemed necessary, it should be wound up or the government’s stake sold to private parties.
  4. This would ensure that the company does not fall prey to the same disincentives and degenerate into a bad bank that engages in impetuous lending

 

 

Report loan defaults in a day: SEBI

Image Source

Note4students

Mains Paper 2: Polity | Statutory, regulatory and various quasi-judicial bodies.

From UPSC perspective, the following things are important:

Prelims level: Particulars of the SEBI

Mains level: Important step in the direction of solving NPA problem in Indian Economy


News

Direction from SEBI

  1. The SEBI has made it mandatory for companies to disclose default on the payment of interest or repayment of principal to banks within a day

Rules under current regulations

  1. Current regulations require listed firms to disclose delay or default in payment of interest/principal on debt securities
  2. But there is no such requirement when loans are taken from banks or financial institutions

Package to resolve NPAs gets Cabinet nod

  1. The government has cleared a package to resolve the persistent rise in non-performing assets that are plaguing
    public sector banks and denting credit growth
  2. The package includes an ordinance to amend the Banking Regulation Act of 1949 to empower the Reserve Bank of India to take more actions to check bad loans
  3. Bad loans in the Indian banking system have gone up sharply in the last one year
  4. According to Reserve Bank of India data, gross NPA, as a percentage of gross advances went up to 9.1% in
    September 2016 from 5.1% in September 2015
  5. During the same period, stressed assets (which is gross NPA plus standard restructured advances and writeoffs), moved up from 11.3% to 12.3% and some estimates suggested it had doubled since 2013
  6. Stressed assets in some of the public sector banks have approached or exceeded 20%
  7. The Economic Survey of 2016-17 has pointed out the twin balance sheet problem — that is, stressed companies on one hand and NPA-laden banks on the other and advocates that a centralised Public Sector Asset Rehabilitation Agency (PARA) be established to deal with the problem of bad loans

Disclosure of names of big loan defaulters pointless: SC

  1. What: The SC said public disclosure of names of defaulters who owe banks over Rs. 500 crore in bad loans is pointless
  2. Background: The observation from the Bench gains significance as it was on the SC’s order that the govt filed a confidential list of 57 defaulters
  3. These defaulters owe the banks about Rs. 85,000 crore in bad loans
  4. The previous hearings had seen the SC turn the heat on the RBI for expressing reluctance in making public the names of big loan defaulters
  5. It had said the RBI should bring the names of defaulters into the public domain through the Right to Information (RTI) Act

Moody’s sees slower pace of new bad loans

  1. Source: A report by Moody’s Investors Service
  2. India’s banking system is moving past the worst of its asset quality slump
  3. While the number of bad quality loans may still increase, the pace will start slowing
  4. 5 Key factors of analysis: Operating environment, asset risk and capital (stable), funding and liquidity, profitability and Govt support
  5. The operating environment for Indian banks is supported by a stabilising economy
  6. Headline GDP growth: Would be 7.4% over the next two years compared with 7.3% in 2015
  7. Key drivers: A favourable monsoon season, ongoing public investment, and continued growth in foreign direct investment

Discuss: Define the terms- Headline GDP Growth, Non Performing Assets

RBI allows banks to sell stressed assets to NBFCs, other lenders

  1. Aim: Speed up the resolution of banks’ bad loans
  2. Allowing a wider range of buyers for stressed assets apart from asset reconstruction companies (ARCs) or securitization companies (SCs) will also help in better price discovery
  3. Criticism: Banks should not be in the business of buying and resolving stressed loans
  4. They should ideally be incentivised to sell these loans to someone who is a specialist in the space

Debt recovery law amendments to ease NPA situation, says govt

  1. Context: Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 received Presidential assent
  2. Highlights: Expansion of definition of security interest, inclusion of debenture trustees and strengthening of asset reconstruction companies
  3. Eased recovery process will help shrink the time for recovering bad assets

PSB recapitalisation to begin in this financial year

  1. News: The Centre is likely to announce the first tranche of the Rs 25,000 crore capital infusion for public sector banks (PSBs), planned for this financial year (2016-17)
  2. The capitalisation plan proposes infusions adding up to Rs 25,000 crore in 2015-16 as well as in 2016-17, followed by Rs 10,000 crore each in 2017-18 and 2018-19
  3. Aim: To improve the PSBs lending capacities as they are restricted by poor asset quality and weak capitalisation
  4. Background: Gross NPAs stood at 7.6%, a 12-year high, in March 2016, according to the Reserve Bank of India’s latest financial stability report
  5. Trivia: PSBs account for about 70% of the total banking system assets

Financial Stability Report – private vs public

  1. RBI has been pushing lenders to review the classification of loans given by them as part of an Asset Quality Review (AQR)
  2. The gross NPAs of public sector banks increased to 9.6% as of March 2016, from about 6% a year earlier, mainly because of AQR
  3. The net NPAs of public sector banks was 6.1%, while the ratio for private sector banks was 4.6%, in March 2016
  4. Stark difference in the credit and deposit growth of public sector banks as compared with their private sector counterparts
  5. Loan growth: Public (4%) vs private (25%)
  6. Deposit growth: Public (5%) vs private (17%)

Financial Stability Report – NPAs

  1. News: Reserve Bank of India (RBI) in its Financial Stability Report, highlighted the grim situation of Non-Performing Assets (NPAs) in India
  2. Findings: Banking sector gross NPAs were at 7.6% in March 2016, the highest in 12 years
  3. Importance: The stress in the banking sector, which mirrors the stress in the corporate sector, has to be dealt with in order to revive credit growth
  4. Expectations: The gross NPAs could rise to 8.5% by March 2017 in the baseline scenario (RBI’s normal assumptions)
  5. If the global macro situation deteriorates, the gross NPA could increase to 9.3% by March 2017

Intermediate mechanism for NPAs on anvil

  1. Context: Bank Board Bureau (BBB) is working out an intermediate mechanism for NPA resolution
  2. Aim: To ensure early resolution of the NPA problem in the banking sector
  3. Also to provide comfort to the bank management with regard to settlement of dues
  4. Mechanism: Will analyse some of the processes which would be triggered to settle the NPAs that the banks are carrying on their balance sheets
  5. Benefit: Will provide a certain degree of comfort to the management of the bank — chief executive or the executive director
  6. Two kind of issues: One is process of resolution & other is the pricing at which the resolution takes place

SBI begins merger with associate banks

  1. Merger: SBI, country’s largest lender, has kick-started the process of merging its five associate banks with itself at one go
  2. It is also exploring the possibility to merge Bharatiya Mahila Bank
  3. Why merge? The merger will make it a bigger bank & will bring in a lot of efficiencies
  4. Now there are a lot of overlaps in bank functions which reduced customer base & these overlaps can be taken out
  5. 5 associate banks: State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore

Is PSL the real problem behind NPAs?

  1. Context: RBI Governor explaining real causes of huge bad loans to Public Accounts Committee (PAC)
  2. Observation: Private sector banks and foreign banks do not have as much NPAs as the Public Sector Banks
  3. This is despite the constraints under which the entire banking sector operates being the same
  4. Excuse: Priority Sector Lending (PSL) requirements are a burden on public sector banks
  5. Notwithstanding: Other banks have 2.2% NPAs whereas PSBs have 5.98% & it is hard to believe that the difference is only due to the PSL

Provision for fraud within 4 quarters: RBI

  1. Provisioning: Banks have to make provision for the entire amount of a loan in transactions where fraud has been detected in a period not exceeding four quarters
  2. Relief: To smoothen the effect of such provisioning on quarterly profit and loss banks have the option to make the provisions over a period
  3. Disclosures: Banks have to make suitable disclosures with regard to the number of frauds reported, the amount involved in such frauds and the quantum of provision made during the year
  4. Background: The direction comes in the wake of loans for food procurement extended by banks to the Punjab government, which have turned bad

Disclose sums owed to banks by defaulters: SC

  1. News: The SC asked the RBI to at least publicly expose the “very substantial amounts” defaulters owe banks in India
  2. The RBI argued that there were also clients who were not wilful defaulters
  3. Any exposure would violate confidentiality and hurt business sentiments, impacting the economy
  4. Challenge: Any disclosure would be violative of the provisions of the the RBI Act along with other laws which grant immunity from disclosure of details of NPAs
  5. Future: The court asked RBI about its next steps in recovering the loans and also to provide information on the status of NPAs

Banks turn the heat on top 50 defaulters

  1. Context: RBI had asked the banks to complete classifying assets as NPA by the 3rd and 4th quarters
  2. News: SBI has summoned borrowers of India Inc who have defaulted in paying their dues, to take stock of the company’s financial position
  3. Reason: In RBI’s list of 150 defaulters, the top 50 defaulters contribute to 80% of the bad loans
  4. The Reserve Bank has allowed banks to take over management control of chronic default firms

RBI unlocks Rs.40,000 crore additional capital for banks

  1. News: RBI revised norms on capital recognition, making available an additional Rs.40,000 crore to Indian banks
  2. Why? Public sector banks(PSBs) are facing pressure on their profitability due to a sharp rise in non-performing assets(NPAs), which is eroding their capital base
  3. Context: Many PSBs reported huge losses for the quarter ended Dec 2015, after the RBI asked lenders to identify several accounts as non-performing
  4. Amendments: RBI has made some amendments to the treatment of certain balance sheet items for the purposes of determining banks’ regulatory capital
  5. Basel III Standards: Review was carried out with a view to further aligning the definition of regulatory capital with the internationally adopted Basel III capital standards

Make names of wilful defaulters public: panel

  1. Context: NPA problem is threatening the stability of the banking system
  2. Background: Wilful defaulters owe PSU banks a total of Rs.64,335 crore or 21%  of total NPAs
  3. News: The Standing Committee on Finance has made many recommendations
  4. The state-owned banks make public the names of their respective top 30 stressed accounts involving wilful defaulters
  5. Reason: It will act as a deterrent and enable banks to withstand pressure and interference from various quarters in dealing with the promoters for recoveries or sanctioning further loans

Learn more about recommendations of Standing Committee on Finance

  1. Specially-tasked committees be mandated to continually monitor the status of large loan portfolios and submit periodical reports to govt and Parliament on the findings
  2. The govt should should make necessary amendments to the RBI Act and other laws and guidelines
  3. The banks have failed to notice the early signs of stress on the loans disbursed by them
  4. The main reason for loans turning NPAs is the diversion of funds by promoters to unrelated businesses

Learn about Strategic Debt Restructuring

  1. Strategic debt restructuring is a new mechanism introduced by the RBI in order to deal with NPAs
  2. Mechanism: A consortium of lenders converts a part of their loan in an ailing company into equity, with the consortium owning at least 51% stake
  3. This will help banks and financial institutions to more easily recover NPAs
  4. Criticism: The SDR scheme increases the risk by postponing NPAs

Bad loans exceed market value of PSBs

  1. Context: All listed public sector banks have gross NPAs in excess of their market capitalization
  2. Burden: For every Rs.100 parked in shares of public sector banks, investors carry the burden of Rs.150 as bad loans, which have cumulatively ballooned to Rs.4 trillion
  3. Comparison: Bad loans of private sector banks are just about 6.6% of their total valuation
  4. Deadline: RBI has set March 2017 as deadline for banks to clean up their balance sheets
  5. It is forcing them to promptly disclose NPAs, take remedial measures and also make adequate provisions in their financial statements

Parekh cautions on RBI’s bad loans tack

  1. Context: Rising NPAs of public-sector banks
  2. Background: RBI Governor’s effort to clean up banks’ balance sheet
  3. Expert Opinion: The objective of the clean-up shall be to fix the financial rot, not to incapacitate banks
  4. Parekh warned that recapitalization is not a long term solution, which means that it is taxpayers that are bailing out the banks
  5. Future: Govt should freely allow the right talent to come in to run PSU banks and prospective new investors who are bringing capital, shall be given a role in running those banks

Clean up the Balance Sheet of Banks

Setting up of an asset reconstruction company by govt is a good idea. But test will lie in giving its managers a free hand.

  1. It will prepare them to lend to the corporate sector as and when economic activity picks up speed.
  2. Non-performing assets (NPAs) and restructured loans of scheduled commercial banks have only increased over the last two years.
  3. They stood at over 11 per cent of total advances in September 2015.
  4. The idea of dipping into taxpayer money for the ARC’s equity is opposed by some on the grounds of it creating a “moral hazard”.
  5. But if banks and corporates are forced to pay for the mess, a state-backed ARC would bring credibility to the asset recovery programme.

RBI to comb bank books to unearth hidden bad loans

The RBI is set to intensify its scrutiny of banks’ financial accounts during the annual financial inspection process.

  1. The regulator is trying to achieve the goal of cleaning up bank balance sheets by March 2017.
  2. Till now, there has been a discrepancy in the NPA numbers that banks report and what the RBI finds during the annual inspections.
  3. Banks have to make a 5% provision for standard assets while provisioning for a sub-standard asset is 15-20%.
  4. The gross NPAs of public sector banks were at 6% at the end of June.

Student loans dry up as bad debts climb at banks

An increase in non-performing assets have led several public sector banks to go slow on educational loans, latest data compiled by the Finance Ministry shows.

  1. Banks were given a target of 20 per cent growth in disbursements.
  2. There are lots of NPAs in the education sector and rising in the last few years.
  3. Due to rising bad loans, the finance ministry, at the request of bankers, has created a credit guarantee fund for education loans.
  4. It has also asked banks to integrate with the Vidya Lakshmi portal.
  5. This is a first of its kind portal providing a single window for students to access information and submit applications for educational loans to banks and for government scholarships.

Bad debts of banks at unacceptable level: FM

Six sectors that were facing maximum stress, iron and steel, textile, power, sugar, aluminium and construction.

  1. The health of the public sector banks(PSBs) was a key subject, particularly in relation to the fact that a carried over problem of the past continues to persist.
  2. The reforms announced in the power sector will relieve the problems with the distribution companies.
  3. The gross The non-performing assets(NPAs) of public sector banks were at 6 per cent, up from 5.2 per cent in March.
  4. The government is also in the process of framing a bankruptcy code aimed to tackle wilful default and a draft paper was recently released.

Need to check flaws in banking system: Rajan

The banking sector is currently struggling with high non performing assets (NPAs)

  1. RBI Governor said there is a need to check flaws in the banking system to ensure that defaulters are not let off scot-free.
  2. Called for “focus” in implementation of economic reforms and improving capacity at every level of economy and village.
  3. He stressed on the role of government spending in reviving growth, especially because exports are not doing as well as in the past.
  4. There are certain aspects like macro stability, human capital, business environment, taxation, judiciary and allocating resources that play a key role in boosting our economy.
  5. Need to constitute state level co-ordination committees to monitor unregistered and illegal operators with the Chief Secretary, DGP and District Collectors in the committees.

RBI revamps JLF mechanism to tackle bad loans

  1. The RBI has revamped the Joint Lenders’ Forum (JLF) norms to ensure mandatory presence of representatives of two systematically important banks,SBI and ICICI Bank.
  2. In JLF Empowered Groups(JLF-EG) formed by bankers to tackle the rising non-performing assets (NPAs).
  3. JLF will finalise the Corrective Action Plan (CAP),will be placed before an empowered group (EG) of lenders, which will be tasked to approve the restructuring packages.
  4. The change would enhance banks’ ability to bring in a change in the ownership of borrowers that were under stress.

Provide subsidy to farmers directly, RBI tells govt

  1. Expressing concern over distortion of the credit culture in agriculture, the Reserve Bank of India (RBI) has written to the government.
  2. The move comes amid rising non-performing assets (NPA) pertaining to the sector. Gross NPAs, as percentage of total agricultural loans, increased to 4.7 per cent as of March this year.
  3. The government provides three per cent interest subvention for short-term crop loans, through banks that charge a lower amount from the farmer and get it reimbursed from RBI at the end of every quarter.
  4. Rising bad loans in the interest rate subvention scheme was a concern was highlighted in RBI’s recently-released annual report.
  5. Though the government has been incentivising repayment of agricultural loans through the interest subvention scheme, this has not helped improve asset quality.

Questions (attempt in the comments section)

1

It is said that reforms in bankruptcy laws can play a crucial role in economic growth and financial stability. In the light of increasing non-performing assets (NPAs) in banks, discuss the statement

2

Reckless lending by public sector banks has been blamed as one of the reasons why certain rich individuals have misused large funds and have become wilful defaulters. Is it an instance of crony capitalism? How should such banks and defaulters be treated by the government? Critically comment.

3

The problem of non-performing assets (NPAs) in the Indian banking system is said to be big and might affect economic growth of the country. What are the approaches that RBI and government are adopting to clean the banking system of NPAs? Examine.

4

It is warned that the hat the non-performing asset (NPA) problems of the Indian banking system might pose a serious crisis to the sector. Critically examine why NPA has become a problem, their effect on the economy and steps needed to address this issue.







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