NPA Crisis

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

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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



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.


  • 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

  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



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