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Context

According to RBI’s recent data The pile of bad loans, or stressed assets, is close to Rs10 lakh crore($154 billion) now, which is more than the GDP of at least 137 countries. And what’s more, it is only growing.

Stressed assets, which include non-performing assets (NPAs) and restructured loans, form some 12% of the total loans in Indian banking now.

What is NPA?

1. 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 a bad loan.
2. 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.
3. 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

Impact of NPA 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 for 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

1. 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.
2. 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 .
3. 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.
4. The Lack of Bankruptcy code in India and the sluggish legal system makes it difficult for banks to recover these loans from both corporate and noncorporate.

Other factors

1. Banks did not conduct 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.
2. 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.
3. Companies with dwindling debt repayment capacity were raising more & more debt from the system.

Why most NPA in the Public sector?

1. Five sectors Textile, aviation, mining, Infrastructure contributes to most of the NPA since most of the loan given in these sectors are by PSB, they account for most of the NPA.
2. 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 a financial crisis, SBI provided it a huge amount of loan which it is not able to recover from it.
3. Less Professional management
4. 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

1. The 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.
2. The government has also proposed to introduce Bankruptcy code which will make it easier for banks to Recover the loans from the debtors.
3. RBI introduced a number of measures in the 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 a refinancing option after every five years, and
• Empowering them to take majority control in defaulting companies under the Strategic Debt Restructuring (SDR) scheme.
• Amendment in banking law to give RBI more powers: The Banking Regulation Act may be amended to give RBI more powers to monitor bank accounts of big defaulters. The amendment in the banking law will enable setting up of a committee to oversee companies that have been the biggest defaulters of loans.
• Stringent NPA recovery rules: The government has over the years enacted and tweaked stringent rules to recover assets of defaulters. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act or Sarfaesi Act of 2002 was amended in 2016 as it took banks years to recover the assets.

How to curb the menace of NPA?

#1. Short-Term measures

1. 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.
2. Bankruptcy code should be passed as soon as possible. Bankruptcy code will make it easier for banks to recover loans from unviable enterprises.
3. The government should establish an ARC with the equity contribution from the government and the Reserve Bank of India (RBI). The established ARC should take the tumour (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

1. 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
2. Sources/structure of equity capital– Banks need to see that promoter’s contribution is funded through equity and not debt.
3. Banks should conduct necessary sensitivity analysis and contingency planning while appraising the projects and it should built adequate safeguards against such external factors.
4. 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.
5. 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.
6. 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.
7. 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

Questions

1. Non-performing assets, restructured loans and written-off assets — collectively called ‘stressed assets’ — have become a major challenge to the country’s banking system. To combat these, what has the government done? Will these measures be effective? Examine.
2. 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.

Recent developments

1. Maldives immigration authority has not been issuing work visas to Indians since March this year.
2. This is retaliation from the Maldives for India’s condemnation of Maldivian President Abdulla Yameen’s declaration of emergency in February after the country’s Supreme Court reversed the conviction of opposition leader, Mohammed Nasheed, and others.
3. The Maldives has also asked India to take back its gift of two Dhruv Advanced Light Helicopters, one manned by the Indian Coast Guard and another by the Indian Navy, by the end of June. Though the Maldivian government has said that these were not the helicopters it wanted, the real worry seems to be the presence of Indian defence personnel who are maintaining and operating the aircraft.
4. In retaliation, it is learnt that Delhi voted against Malé and in favour of Indonesia for a non-permanent seat at the UN Security Council last week.

Weakening ties between India and the Maldives

1. There has been a series of setbacks in India-Maldives ties, starting from March 2015 when Prime Minister Narendra Modi cancelled a visit
2. Recent moves by Abdulla Yameen, President of the Maldives, have put Malé on a collision course with New Delhi
3. India criticised the government for its incarceration of former President Maumoon Abdul Gayoom and Chief Justice Abdulla Saeed, sentenced to 19 months in prison for an alleged plot to unseat Mr. Yameen
4. The Maldives in December 2017 also signed a free trade agreement with China
5. The Maldives, under Yameen, is also wooing Pakistan, China’s closest friend and ally. Soon after Pakistani army chief General Qamar Javed Bajwa paid a visit to Malé, Islamabad offered a $10 million loan to finance the purchase of two Super Mushak aircraft from Pakistan’s Aeronautical Complex.
6. The strain is now evident in two areas where India-Maldives ties had been the strongest: strategic relations and people-to-people engagement

Internal developments in the Maldives which concerned India in recent past

Islamist radicalisation

1. In the past decade or so, the number of Maldivians drawn towards terrorist groups like the Islamic State (IS) and Pakistan-based madrassas and jihadist groups has been increasing.
2. In terms of proportion to population, this number of Maldivian nationals(200) joining IS, is quite high compared to other South Asian countries, irrespective of whether they are Muslim-majority countries.
3. Political instability and socio-economic uncertainty are the main drivers fuelling the rise of Islamist radicalism in the island nation.
4. India has two worries in this regard:

• the exfiltration of members of Indian terror groups like the Students Islamic Movement of India (SIMI) and the Indian Mujahideen (IM) to the Maldives after their crackdown in India
• the possibility of LeT using remote Maldivian islands as a launch pad for terror attacks against India and Indian interests.

Overall, India’s concern is regarding how radical Islamist forces have been gaining political influence in the neighbourhood.

Role of China

1. China’s strategic footprint in India’s neighbourhood has increased.
2. The Maldives has emerged as an important ‘pearl’ in China’s “String of Pearls” for ensuring the security of its sea lanes, especially the unhindered flow of critically-needed energy supplies from Africa and West Asia through the Indian Ocean.
3. Chinese have remained among the top visitors to the Maldives. Beijing has evinced a keen interest in developing infrastructure in the Ihavandhoo, Marao and Maarandhoo Islands.
4. During Chinese President Xi Jinping’s visit in 2014, the Maldives agreed to become a partner in China’s Maritime Silk Route.
5. China has provided grant and loan assistance to the Maldives to build a bridge between the capital and the airport (called the China-Maldives friendship bridge).
6. Amendments to the Maldivian Constitution in July 2015 allowed foreigners to own land, including investments of over US$ 1 billion for projects where 70 per cent of the land has been reclaimed. Looking at the parameters, China will be the obvious beneficiary.
7. Chinese nationals now account for the largest tourist arrivals in the islands.
8. India views the growing Chinese footprint in the Maldives with concern. India’s concern stems from the increasing Chinese strategic presence in the Indian Ocean region.
9. Though the Maldivian government under Yameen has reassured India that the Chinese presence is purely economic, the concern of ‘places turning into bases’ is genuine
10. In December 2017, China signed the Free Trade Agreement with the Maldives.
11. It paves the way for a tighter embrace between Beijing and Maldives and it will also open the Maldives to Chinese goods and tourists in unprecedented numbers.
12. Delhi saw this as a betrayal of the Maldives’ publicly stated “India First” policy

Way forward

1. The Yameen government must reconsider these policies.
2. India too must pause to consider why relations have soured so badly.
3. India cannot take its predominant power in South Asia for granted.
4. Whether it is Nepal, where the people recently elected the pro-Chinese and moderate Communist, K.P. Oli, to power, or the Maldives, Delhi must abandon their perceived arrogance towards its smaller neighbours.
5. India needs to separate ground reality from its desires — whatever its discomfort with Yameen, it has to learn to deal with him.
6. Elections are due in the Maldives later this year and Delhi must realistically assess the pros and cons, including its policy towards exiled former president Mohamed Nasheed, before taking sides.
7. China is here to stay in the Maldives, as well as across the rest of South Asia. Delhi needs to learn to deal with issues realistically.

Question

1. There is unmistakable evidence of souring of ties between India and Maldives. Why has the relationship deteriorated? How can it be improved?

How Telangana supports farmers with Rs 4,000 for every acre they own

Why in News

1. An income support scheme for farmers in Telangana has earned the appreciation of outgoing Chief Economic Advisor Arvind Subramanian.
2. It formally gives scope for the feasible framework at pan-India level.

What Rythu Bandhu provides?

1. Under Rythu Bandhu, the Telangana government gives every beneficiary farmer Rs 4,000 per acre as investment support before every crop season.
2. The objective is to help the farmer meet a major part of his expenses on seed, fertiliser, pesticide, and field preparation.
3. The scheme covers 1.42 crore acres in the 31 districts of the state, and every farmer owning land is eligible.
4. Officials said 92% of the beneficiaries own less than 5 acres, 5% own 5-10 acres and the remaining 3% own more than 10 acres.

Payment

1. The government plans to extend the flat Rs 4,000-per-acre subsidy to the rabi season as well, with the distribution of cheques from November 18.
2. The government has allocated Rs 12,000 crore for Rythu Bandhu in 2018-19; the 24×7 free power supply to farmers is estimated to cost another Rs 1,000 crore.
3. The government will issue cheques rather than make direct benefit transfer (DBT) because banks might use the DBT money to adjust against farmers’ previous dues.
4. The cheques have been distributed along with free Pattadar Dharani passbooks with updated information including ownership and land purchase and sale.

Beneficiaries

1. The government had initially drawn up a list of 72 lakh beneficiaries based on a revenue department survey last year.
2. Lack of proper land records resulted in the total being shortlisted at 57.33 lakh.
3. But the records are still under rectification and more farmers will be added to the list later.

Relief from Indebtedness – the major impact

1. Rythu Bandhu money provides that cushion to the farmer because with that money the farmer can purchase seeds and fertiliser and start sowing.
2. If a bank approves his loan later then it is of additional help to hire farm labour etc but at least he is not going to moneylenders.

Criticisms of the scheme

1. The foremost issue is that it does not exclude rich farmers and wealthy landlords. The scheme does, however, have a provision under which cheques can be returned to the local authorities.
2. The scheme leaves out tenant cultivators — an estimated 40% of Telangana’s farming population and mostly coming from the poorest and most disadvantaged backgrounds. Tenant farmers cannot be included in the scheme as they cannot submit any proof of cultivation of land, which is done mostly based on informal and oral lease arrangements. Their frequent movement makes it very difficult to identify them. If they are included in the scheme, it will lead to unnecessary litigation.

Way forward

1. Acute agri distress is a grim reality that needs to be tackled on a war footing. Schemes like Rythu Bandhu show promise.
2. Filter out the rich farmers (on the basis of factors like income, land and asset ownership etc) so as to make the model more cost-effective and impactful.
3. The model will have to be customised to suit the agro-climatic and socio-economic variations across India. A blanket approach will not work.