NPA Crisis

NPA Crisis

What is ‘Yes Bank Crisis’?Priority 1


From UPSC perspective, the following things are important :

Prelims level : Role of RBI coping bank failures

Mains level : Read the attached story

On the advice of the Reserve Bank of India (RBI), the government imposed a moratorium on Yes Bank with effect from 6 p.m. on March 5 up to April 3. This has created a furore among the account holders of the bank.

What restrictions did RBI put?

  • The RBI superseded the private sector lender’s board and appointed as an administrator.
  • Under the moratorium, deposit withdrawals have been capped at ₹50,000.
  • Within 24 hours, the RBI proposed a reconstruction scheme under which SBI could take a maximum 49% stake in the restructured capital of the bank.

Why was it imposed?

  • The RBI cited a steady decline in Yes Bank’s financial position mainly due to the lender’s inability to raise adequate capital to make provisions for potential non-performing assets.
  • This failing resulted in downgrades by credit rating agencies, which in turn made capital raising even more difficult — a vicious cycle that further worsened its financials.
  • This apart there were serious lapses in corporate governance.
  • The bank has also experienced serious governance issues and practices in the recent years which have led to steady decline of the bank.

When did it all start?

  • As on March 31, 2014, the bank’s loan book was ₹55,633 crore and deposits were ₹74,192 crore.
  • Since then the loan book expanded fourfold to ₹2,24,505 crore while deposit growth failed to keep pace and increased less than three times to ₹2,09,497 crore.
  • Asset quality also worsened during the period with gross non-performing assets sharply rising from 0.31% as on March 31, 2014, to 7.39% at the end of September 2019.
  • The exponential growth at Yes Bank during that period also came under the regulator’s scanner.
  • The lender has substantial exposure to several troubled borrowers including the IL&FS.

What will be the likely impact on depositors?

  • While deposit withdrawals have been capped at ₹50,000, there are exceptions under which a higher amount can be withdrawn, with the permission of the RBI.
  • The RBI can allow a customer to withdraw more than ₹50,000 under the following conditions:
  1. in connection with the medical treatment of the depositor or any person actually dependent on the depositor;
  2. towards the cost of higher education of the depositor or any person actually dependent on him for education in India or outside India;
  3. to pay obligatory expenses in connection with marriage or other ceremonies of the depositor or his/her children or of any other person actually dependent upon depositor;
  4. or any other unavoidable emergency.
  • The total withdrawal should, however, not exceed ₹5 lakh or the actual balance in the account, whichever is lower.

What about deposit insurance?

  • In case Yes Bank goes belly up for any reason, depositors will not lose all their money since deposits up to ₹5 lakh are covered under deposit insurance.
  • While the deposit insurance cover was ₹1 lakh till recently, this was increased to ₹5 lakh in the aftermath of the crisis at the Punjab and Maharashtra Cooperative (PMC) Bank Limited.
  • Finance Minister has announced the increase in deposit insurance in this year’s Budget.

What do such bank failures imply?

  • While the government and the regulator have asserted that the problem is solely related to this particular bank, the latest developments spotlight the governance risks in India’s banking sector.
  • There is a risk that the already poor operating environment for the banking sector could suffer further impairment if the government’s efforts to tackle problems in the bank fail to provide reassurance to depositors and investors.
NPA Crisis

[pib] Partial Credit Guarantee SchemeGovt. Schemes


From UPSC perspective, the following things are important :

Prelims level : Partial Credit Guarantee Scheme

Mains level : NPA issue

The Union Cabinet has approved a partial credit guarantee scheme for public sector banks (PSBs) to purchase high-rated pooled assets from financially sound NBFCs and housing finance companies.

What is the decision about?

  • PSBs can purchase high-rated pooled assets from financially sound NBFCs/Housing Finance Companies (HFCs), with the amount of overall guarantee provided by government till the first loss of up to 10 per cent of fair value of assets being purchased by banks or Rs 10,000 crore, whichever is lower.
  • The scheme would cover NBFCs / HFCs that may have slipped into SMA-0 category during the one year period prior to 1.8.2018, and asset pools rated “BBB+” or higher.

Partial Credit Guarantee Scheme

  • The Union Government had issued the PCG Scheme in the Union Budget this year to provide a one-time partial credit guarantee to PSBs for purchase of pooled assets of financially sound NBFCs.
  • It aims to address temporary asset liability mismatches of otherwise solvent NBFCs/HFCs without having to resort to distress sale of their assets for meeting their commitments.
  • It allows PSBs to purchase pooled assets enabled by Government guarantee support under the Scheme to addressing temporary liquidity / cash flow mismatch issues of otherwise solvent NBFCs / HFCs.
  • This pooling would allow NBFCs without them having to resort to distress sale of their assets for meeting their commitments.
  • This will provide liquidity to the NBFC / HFC concerned for financing the credit demand of the economy, and also protect the financial system of the country from any adverse contagion effect that may arise due to the failure of such NBFCs / HFCs.

Validity of the scheme

  • The window for one-time partial credit guarantee offered by GoI will open from the date of issuance of the Scheme by the Government for a period of six months, or till such date by which Rupees One lakh crore assets get purchased by banks, whichever is earlier.

Major Impact

  • The proposed Guarantee support and resultant pool buyouts will help address NBFCs/HFCs resolve their temporary liquidity or cash flow mismatch issues.
  • It will enable them to continue contributing to credit creation and providing last mile lending to borrowers, thereby spurring economic growth.
NPA Crisis

Advisory Board for Banking Frauds (ABBF)DOMRPriority 1


From UPSC perspective, the following things are important :

Prelims level : ABBF

Mains level : Terms of reference for ABBF

Advisory Board for Banking Frauds (ABBF)

  • The Central Vigilance Commission (CVC) has constituted an Advisory Board for Banking Frauds (ABBF).
  • It will be headed by former Vigilance Commissioner T.M. Bhasin to examine bank fraud of over ₹50 crore and recommend action.
  • The panel in its previous avatar was called the Advisory Board on Bank, Commercial and Financial Frauds.

Terms of reference

  • The ABBF, formed in consultation with the RBI, would function as the first level of examination of all large fraud cases before recommendations or references are made to the investigative agencies by the respective public sector banks (PSBs)..
  • The four-member board’s jurisdiction would be confined to those cases involving the level of officers of General Manager and above in the PSB in respect of an allegation of a fraud in a borrowal account.
  • Lenders would refer all large fraud cases above ₹50 crore to the board and on receipt of its recommendation or advice, the bank concerned would take further action in such matter.
  • The CBI may also refer any case or matter to the board where it has any issue or difficulty or in technical matters with the PSB concerned.
  • The board would also periodically carry out frauds analysis in the financial system and give inputs for policy formulation related to the fraud to the RBI.
  • Headquartered in Delhi, the Reserve Bank of India will provide required secretarial services, logistic and analytical support along with the necessary funding to the board.

Membership of the panel

  • The tenure of the Chairman and members would be for a period of two years from August 21, 2019, .
NPA Crisis

Project SashaktPriority 1


From UPSC perspective, the following things are important :

Prelims level : Project Sashakt

Mains level : Curbing NPAs

  • RBI made it mandatory for lenders to enter into an Inter-Creditor Agreement (ICA) during the review of the borrower account within 30 days from date of first default to any lender.
  • ICA allows banks to decide resolution strategy outside the IBC and it will help lenders to accelerate process to resolve stressed assets.

New Framework under Sashakt

  • The Sashakt ICA can be modified to incorporate the requirements of New Framework and serve as the Master Inter-Creditor Agreement for resolution of all stressed asset.
  • Under the new framework, it is a mandatory requirement for lenders to enter into an Inter-Creditor Agreement (ICA) during the review of the borrower account within 30 days from date of first default to any lender.
  • The New Framework further lays down some parameters to be included in the ICA including decision-making by lenders holding 75% (by value of total outstanding facilities) and 60% by number and protection of dissenting lenders.
  • The ICA is required to be executed by all lenders covered under the New Framework and asset reconstruction companies.

What is Project Sashakt?

  • Project Sashakt was proposed by a panel led by PNB chairman Sunil Mehta to help consolidate stressed assets.
  • Bad loans of up to ₹ 50 crore will be managed at the bank level, with a deadline of 90 days.
  • For bad loans of ₹ 50-500 crore, banks will enter an inter-creditor agreement, authorizing the lead bank to implement a resolution plan in 180 days, or refer the asset to NCLT.
  • For loans above ₹ 500 crore, the panel recom­mended an independent AMC, supported by institutional funding through the AIF.


  • According to the committee, banks will have to set up an AMC under which there will be multiple sector-specific AIFs.
  • These funds will invest in the stressed assets bought by existing (Asset Reconstruction Companies) ARCs, such as ARCIL.
  • The ARCs will use the Alternative Investment Funds (AIFs) to redeem security receipts issued to banks against the bad loans.
  • Other AMC-AIFs and ARCs will be allowed to bid for these assets, and match the pricing offered by ARCIL or the national AMC.
  • The AMC will be responsible for the operational turnaround of the asset.

Who will own the stressed asset?

  • The ARC after buying the asset from lenders will transfer ownership to the AIF.
  • The new owner, the AMC-AIF, will hold a stake of at least 76%.
NPA Crisis

RBI revises stressed asset resolution normsPriority 1


From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : Steps for stressed asset resolution

  • The RBI has released revised set of norms on stressed asset resolution which are substantially less stringent from the previous one.

Inter-Creditor Agreement (ICA)

  • The inter-creditor agreement is aimed at the resolution of loan accounts with a size of ₹50 crore and above that are under the control of a group of lenders.
  • It is part of the Sashakt plan approved by the government to address the problem of resolving bad loans.
  • The lenders may also choose to initiate legal proceedings for insolvency or recovery as per the news circular.
  • If the RP is to be implemented, lenders have been asked to enter into an inter-creditor agreement (ICA), within the review period, to provide for ground rules for finalization and implementation of the RP.
  • The ICA shall provide that any decision agreed by lenders representing 75% by value of total outstanding credit facilities (fund-based as well as non-fund based) and 60% of lenders by number shall be binding upon all the lenders.
  • The RP will have to implement within 180 days from the end of review period.

Review Period

  • The new circular asked lenders to undertake a prima facie review of the borrower account within 30 days from a default, which is termed as review period.
  • During this review period, lenders may decide on the resolution strategy, including the nature of the resolution plan (RP), the approach for implementation of the RP etc.
  • The review period shall commence not later than the date of the this circular for loans above Rs. 2000 crore; January 1 ,2020 for loans above Rs. 1,500 crore to Rs. 2,000 crore.

What if Resolution Plan delayed?

  • There is a disincentive for banks if they delay implementing a viable resolution plan.
  • In case the plan is not implemented within 180 days from the end of review period, banks have to make additional provision of 20% and another 15% if the plan is not implemented within 365 days from the start of the review period.
  • The additional provisions would be reversed if resolution is pursued under Insolvency and Bankruptcy Code (IBC).
NPA Crisis

RBI uses divergence to compel banks to improve their loan-loss ratiosPrelims Only


From UPSC perspective, the following things are important :

Prelims level : NPA Divergence

Mains level : NPA Crisis

  • Few public sector banks that have reported earnings for the January-March quarter have mentioned ‘divergence’ in bad loan recognition and have made provisions for such loans.

What is NPA Divergence?

  • Divergence is the difference between central bank and RBI’s assessment and that reported by the lender.
  • Divergence takes place when the RBI finds that a lender has under-reported (or not reported at all) bad loans in a particular year and hence asks the lender to make disclosures if under-reporting is more than 10% of bad loans or the provisioning.
  • Higher provisioning for divergence was one of the reasons for them to report losses for the quarter.
  • Interestingly, divergence was identified not because these banks hadn’t classified the loan as non-performing assets (NPA) but because they were late in classifying them.

Classifying NPA’s

  • Since the date of classification as NPA had been pushed back, the banks had to make higher provisioning due to the ageing factor.
  • In the first stage of NPA, which is the ‘sub-standard’ category, 15-20% provision is required and for next category, which is ‘doubtful’, a 40% provision is required.
  • RBI has now made it mandatory that when one bank declares an account as NPAs, all other banks need to classify it as an NPA, so the sources of funds are blocked to the errant borrowers.
NPA Crisis

RBI asks NBFCs to appoint Chief Risk OfficerPriority 1


From UPSC perspective, the following things are important :

Prelims level : CRO and its terms of reference

Mains level : Curbing NPAs

  • The RBI has asked the non-banking financial companies (NBFCs) with assets of more than ₹5,000 crore to appoint a chief risk officer (CRO).

Why such move?

  • With the increasing role of NBFCs in direct credit intermediation, there is a need for NBFCs to augment risk management practices.
  • RBI’s move comes in the wake of ongoing rating downgrades of non-banks which has raised fears of another liquidity crisis.
  • Following a series of defaults by Infrastructure Leasing and Financial Services Ltd (IL&FS) last year, mutual funds with exposure to debt papers of the company had to write off a chunk of their holdings.
  • This, and the ensuing defaults by some non-banking financial companies (NBFCs), had led to the liquidity crisis.

Terms of Reference for Chief Risk Officer (CRO)

  • The primary role of the risk officer will be identification, measurement and mitigation of risks.
  • All credit products (retail or wholesale) shall be vetted by the CRO from the angle of inherent and control risks.
  • The CRO’s role in deciding credit proposals shall be limited to being an adviser.

Reporting by CRO

  • RBI has mandated that the CRO shall report directly to the MD and CEO or the risk management committee (RMC) of the board.
  • Moreover, in case the CRO reports to the MD and CEO, the risk management committee or the board shall meet the CRO in the absence of the MD and CEO, at least on a quarterly basis.
  • The CRO shall not have any reporting relationship with the business verticals of the NBFC and shall not be given any business targets.

Appointment and Transfer

  • The CRO shall be a senior official in the hierarchy of an NBFC and shall possess adequate professional qualification or experience in the area of risk management.
  • The CRO shall be appointed for a fixed tenure with the approval of the board.
  • There shall not be any ‘dual hatting’ i.e. the CRO shall not be given any other responsibility.
  • The CRO can be transferred or removed from his post before completion of the tenure only with the approval of the board.
  • And such premature transfer or removal shall be reported to the department of non-banking supervision of the regional office of RBI under whose jurisdiction the NBFC is registered.
NPA Crisis

[op-ed snap] Resolving India’s banking crisisMains Onlyop-ed snap


From UPSC perspective, the following things are important :

Prelims level : NPA

Mains level : Resolving NPA crisis


The government that assumes office after the general election will have to crack a serious and unresolved problem: India’s banking sector.


  • Non-performing assets (NPAs) at commercial banks amounted to ₹10.3 trillion, or 11.2% of advances, in March 2018. Public sector banks (PSBs) accounted for ₹8.9 trillion, or 86%, of the total NPAs.
  • The ratio of gross NPA to advances in PSBs was 14.6%.
  • These are levels typically associated with a banking crisis.

Origin of the crisis

1. Credit Boom –

  • The answer lies partly in the credit boom of the years 2004-05 to 2008-09. In that period, commercial credit (or what is called ‘non-food credit’) doubled. I
  • Indian firms borrowed furiously in order to avail of the growth opportunities they saw coming.
  • Most of the investment went into infrastructure and related areas — telecom, power, roads, aviation, steel. Businessmen were overcome with exuberance, partly rational and partly irrational.

2.Problems with projects

  • Thereafter, as the Economic Survey of 2016-17 notes, many things began to go wrong.
  • Thanks to problems in acquiring land and getting environmental clearances, several projects got stalled.
  • At the same time, with the onset of the global financial crisis in 2007-08 and the slowdown in growth after 2011-12, revenues fell well short of forecasts. Financing costs rose as policy rates were tightened in India in response to the crisis.
  • The depreciation of the rupee meant higher outflows for companies that had borrowed in foreign currency.
  • This combination of adverse factors made it difficult for companies to service their loans to Indian banks.
  • The year 2014-15 marked a watershed.
  • The Reserve Bank of India (RBI), acting in the belief that NPAs were being under-stated, introduced tougher norms for NPA recognition under an Asset Quality Review.
  • NPAs in 2015-16 almost doubled over the previous year as a result.  It’s just that the cumulative bad decisions of the past were now coming to be more accurately captured.

Impact of higher NPAs

  • Higher NPAs mean higher provisions on the part of banks.
  • Provisions rose to a level where banks, especially PSBs, started making losses. Their capital got eroded as a result. Without adequate capital, bank credit cannot grow.
  • Even as the numerator in the ratio of gross NPAs/advances rose sharply, growth in the denominator fell.

Reason for high NPAs in Public Sector Banks

  • PSBs had a higher exposure to the five most affected sectors — mining, iron and steel, textiles, infrastructure and aviation.
  • These sectors accounted for 29% of advances and 53% of stressed advances at PSBs in December 2014.
  • For private sector banks, the comparable figures were 13.9% and 34.1%. Our rough calculations show that PSBs accounted for 86% of advances in these five sectors.

Plans to prevent such crises

1. Resolve NPAs –

  • One immediate action that is required is resolving the NPAs.
  • Banks have to accept losses on loans (or ‘haircuts’).
  • They should be able to do so without any fear of harassment by the investigative agencies.

2. Loan Resolution Authority – An alternative is to set up a Loan Resolution Authority, if necessary through an Act of Parliament.

3. Recapitalising Banks – Second, the government must infuse at one go whatever additional capital is needed to recapitalise banks — providing such capital in multiple instalments is not helpful.

4. Monitoring macro-prudential indicators –Over the medium term, the RBI needs to develop better mechanisms for monitoring macro-prudential indicators.

5.Governance strengthening at PSBs – Actions needs to be taken to strengthen the functioning of banks in general and, more particularly, PSBs. Governance at PSBs, meaning the functioning of PSB boards, can certainly improve.

6.Risk management

  • Other aspects of concentration risk remain to be addressed. We need to induct more high-quality professionals on PSB boards and compensate them better.
  • Succession planning at PSBs also needs to improve.


The task of accelerating economic growth is urgent. This is not possible without finding a solution to the problems that confront the banking system. There is ample scope for improving performance within the framework of public ownership. It can be done. What is needed is a steely focus on the part of the government.

NPA Crisis

Explained: Section 7 of RBI ActDOMR


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: Section 7 of the RBI Act, 1934

Mains level: Govt- RBI autonomy issues



  1. Section 7 (1) of The RBI Act, 1934, became a contentious issue after the tension between the central bank and government turned into a public spat over the last few days.
  2. No government has so far invoked this section in the central bank’s 83-year history.

The widening rift

  1. Simmering differences between the Reserve Bank of India (RBI) and the government – over issues of public sector bank regulation, resolution of distressed assets and the central bank’s reserves – have reached a high-point.
  2. Disagreements and differences between the central bank and the Centre are traditional and often seen as inevitable.
  3. But the latest tussle between the RBI and the union government is actually a series of smaller disputes .
  4. They go beyond the classic debate and spill into the more contentious realm of policy-making and regulation.

Reaching a Flash Point

  1. Amid these tensions the govt. has initiated steps towards invoking its powers under Section 7 of the RBI Act of 1934.
  2. It is a provision under which the government can give directions to the RBI to take certain actions “in the public interest”.
  3. This provision has been built into the law governing not just the RBI but also regulatory bodies in other sectors.
  4. Until now, however, the government has never exercised its powers under Section 7 of the RBI Act.

Section 7 of the RBI Act, 1934

  1. Under Section 7, “The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.
  2. Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.
  3. Section 7 has two parts — consultation and then issuing a direction to the RBI for taking some action in public interest.

 For first time

  1. It is rumored that he government has started the first step towards invoking those powers under Section 7.
  2. It is to start consultations with the RBI Governor on issues such as easing the PCA framework, providing more credit to small units.
  3. Such moves have reportedly upset the central bank.

War of Words over Autonomy

  1. In a speech at a function, RBI Deputy Governor had warned that government.
  2. He said that the Govts. that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution.
  3. While RBI Governors had conflicts with the government earlier too, these had never reached the extent of initiating consultations under Section 7.

Arguments by the government

  1. The autonomy for the central bank, within the framework of the RBI Act, is an essential and accepted governance requirement.
  2. Governments in India have nurtured and respected this.
  3. Both the Government and the Central Bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy.
  4. For the purpose, extensive consultations on several issues take place between the duos, time to time and this is equally true of all other regulators.

Core of the Issue

  1. The government has only initiated consultations with RBI on different issues under Section 7 (1) and not invoked it.
  2. The govt has send written consultations to the RBI citing Section 7, without actually implementing it.
  3. These letters were to do with the Centre’s desire for the:
  • Power sector’s NPAs to be reclassified
  • Issue of RBI’s dividends to the Centre and
  • ’s desire for easing the PCA norms so as to increase lending to the MSME sector

Way Forward

  1. Last year, Former Governor Y V Reddy had noted that the government has powers to give directions.
  2. But, in giving directions also, unlike other statutes, consultation with the Governor is necessary in regard to the RBI before issuing the directions.
  3. Independence to the central bank is granted by the government with a specific purpose.
  4. Experience has also shown that trust and confidence will improve if the spending authority, viz., the government is separate from the money creating authority, that is, central bank or monetary authority.
NPA Crisis

[op-ed snap] The anatomy of banking fraudsop-ed snap


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Financial Stability Report, Central Vigilance Commission (CVC)

Mains level: Recent banking frauds in India and how to avoid such instances in future


Rising instances of fraud in the banking system

  1. The latest Financial Stability Report of the Reserve Bank of India (RBI) shows, the Indian banking system reported about 6,500 instances of fraud involving over ₹30,000 crore in the last fiscal
  2. The Central Vigilance Commission (CVC) has also released the analysis of the top 100 banking frauds
  3. It analyzed frauds in different sectors and has also suggested measures that will help avoid such unscrupulous activities in the future

Some findings by CVC

  1. The companies in the jewellery business inflated the value of imported diamonds to avail of a higher amount of loans
  2. They took credit on the pretext that their export bills remained unpaid because of the financial difficulties faced by overseas buyers
  3. They found innovative ways to take credit from one bank before shipping products to overseas buyers and from another after shipping and duped the lenders
  4. A company in the manufacturing sector showed an audited balance sheet with a net profit of ₹23.74 crore in a particular year and got credit facilities from a consortium of banks
  5. However, without informing the lenders, it later revised its balance sheet and the profit shrank to ₹0.34 crore
  6. The books were manipulated with a clear intention of defrauding banks
  7. The most audacious among the cases mentioned was that of the fixed deposit (FD) fraud
  8. The fraudster presented himself as a bank representative to companies and government organizations
  9. For banks, he became a financial advisor of those organizations and managed to mobilize large bulk deposits
  10. He gave fake term deposit receipts (TDRs) to depositors. The miscreant later opened loan accounts in the name of the depositors by giving fictitious documents and original TDRs and took the money away

Need for more diligence

  1. Most frauds show that banks did not do proper due diligence, both before and after disbursing loans
  2. In order to check frauds, banks will need to improve their due diligence capabilities
  3. This will lead to better credit appraisal and also help contain non-performing assets (NPAs)

Leveraging technology

  1. As the financial system evolves, expands and gets more sophisticated, banks will need to be better prepared to avoid frauds
  2. The  banks can leverage technology to detect frauds and improve the sharing of information

Role of auditors

  1. Aside from improving capabilities in the banking system, accountability of third-party service providers such as auditors and lawyers should also be fixed
  2. India needs a system where auditors and other professionals vetting fake documents are not able to escape

Way forward

  1. Some of the recent frauds and the accumulation of NPAs in the system show that Indian banks need significant improvements in operation and governance standards
  2. This is necessary as large frauds can increase reluctance in the banking system to lend, affecting the flow of credit
NPA Crisis

[op-ed snap] Not just liquidity: on NBFCs crisisop-ed snap


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: NPA crisis & its expanse to various sectors of economy


NBFC crisis unfolding

  1. The default of Infrastructure Leasing & Financial Services (IL&FS) on several of its debt obligations over the last couple of months has raised serious questions about how regulators missed the growing debt pile of a systemically important financial institution
  2. Apart from the obvious failure of regulators to do their jobs, the IL&FS saga has also exposed the underlying weaknesses in the non-banking financial company (NBFC) sector as a whole which has depended heavily on low-cost, short-term debt financing to sustain its shaky business model
  3. Then there is the further, and more serious, risk of NBFCs being unable to roll over their short-term debt in case of a severe credit crunch in the aftermath of the IL&FS saga

Rise of NBFCs

  1. The rise of NBFCs was fuelled primarily by the demise of traditional banks which have been unable to lend as they were bogged down by non-performing loans

Government’s response

  1. The response of policymakers to the ongoing crisis, which seems warranted if its purpose is to prevent a wider systemic crisis, is fraught with other risks
  2. The Reserve Bank of India, the National Housing Bank and the State Bank of India last week decided to increase the supply of liquidity in the market to keep interest rates under control
  3. The RBI has also urged NBFCs to make use of equity rather than debt to finance their operations
  4. This is apart from the government’s decision to replace IL&FS’s management and commitment to providing the company with sufficient liquidity

What could this lead to?

  1. While offering easy money may be a welcome measure in the midst of the ongoing liquidity crisis, the prolonged supply of low-cost funds to the NBFC sector also creates the risk of building an unsustainable bubble in various sectors of the economy
  2. Defaults associated with any such bubbles will eventually only affect the loan books of lenders
  3. State bailouts could also fuel the problem of moral hazard as other financial institutions may expect a similar lifeline in the future

Way forward

  1. Policymakers should thus try to focus on taking steps to address structural problems that contributed to the crisis
  2. This includes steps necessary to widen the borrower base of NBFCs which have been banned from accepting deposits
  3. This would allow NBFCs to tap into more reliable sources of funding and avoid similar liquidity crises in the future
NPA Crisis

[op-ed snap] Rescuing IL&FSop-ed snap


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Too big to fail institutions and their risk of failing


IL&FS in problem

  1. The Centre has decided to supersede the Board of Directors of the troubled Infrastructure Leasing & Financial Services (IL&FS)
  2. By explicitly stating its intent to “ensure that needed liquidity is arranged for IL&FS from the financial system”, the Centre has sent out an unambiguous message to the markets that it will not allow the company to fail
  3. A lot of the turbulence witnessed in the debt and stock markets could have been avoided had the government acted earlier

Rescue plan for the company

  1. Any rescue plan for the beleaguered company obviously had to begin with replacing the existing management that was responsible for mismanaging its affairs
  2. Which lender or shareholder would commit to extending support to the company when it was defaulting regularly and the same set of people responsible for the mismanagement continued to be in charge?
  3. Against this backdrop, a change in management and the appointment of experienced people should lend confidence to lenders and investors

Importance of IL&FS

  1. The company is listed as “systemically important” by the Reserve Bank of India, and with over ₹1,15,000 crore of assets and ₹91,000 crore of debt, it is too big to fail
  2. The interlinkages between IL&FS and other financial sector entities such as banks, mutual funds and infrastructure players are too strong and the company would have taken them all down with it if it were allowed to fail

Reasons for failure

  1. The problem appears to be one of liquidity and not solvency
  2. It is a classic case of over-leveraging and an asset-liability mismatch caused by funding projects of 20-25 years payback period with relatively short-term funds of 8-10 years

Need of long term lending

  1. There is a felt need for long-term finance sources for infrastructure projects
  2. The LIC and some insurance companies are the only domestic sources and they too do not lend beyond 10 to 12 years
  3. The Centre and the RBI should look at ways to deepen the debt markets where infrastructure players can borrow long-term
  4. It also needs to be analysed how a company listed as “systemically important” managed to fly under the radar with misgovernance
NPA Crisis

[op-ed snap] Power games: on issues in the power sectorop-ed snap


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

From UPSC perspective, the following things are important:

Prelims level: IBBI

Mains level: NPAs in the infrastructure sector and how it would be better to revive them in of insolvency


Stay order of SC on IBC proceedings of the power sector

  1. The Supreme Court has ordered a stay on the Reserve Bank of India’s February 12 circular asking banks to recognise loans as non-performing even if repayment was delayed by just one day, and resolve them within 180 days
  2. This comes just weeks after the Allahabad High Court refused to grant relief to troubled power companies facing action from the RBI

Impact of this decision

  1. The apex court’s decision to overturn RBI rules and transfer all pleas seeking exception from them to itself is clearly the biggest challenge against the IBC yet
  2. It is likely to cause significant uncertainty in the resolution of stressed assets and undermine investor confidence in the bankruptcy process
  3. The postponement of the Supreme Court’s next hearing of the case to mid-November will send the signal that there are likely to be considerable delays in the resolution of stressed assets
  4. This is in contrast to hopes that asset resolution under the new bankruptcy regime would be done within a strict time frame

What about stakeholders?

  1. According to the Association of Power Producers, the Supreme Court’s order will save stressed companies producing 13GW worth of power from being pushed to the doors of bankruptcy courts
  2. Banks, too, will be happy as the reprieve will help them delay the recognition of bad loan losses
  3. But, Supreme Court’s decision to intervene, however, will do very little good in the long run to either stressed power companies or their lenders

Why is power sector facing such troubles?

  1. The absence of meaningful price reforms
  2. Unreliable fuel supply
  3. The unsustainable finances of public sector power distribution companies

Flaws in the insolvency process

  1. According to a report released by the Insolvency and Bankruptcy Board of India earlier this month, lenders could realistically expect to recover less than a tenth of their dues if stressed assets are to be liquidated
  2.  This could be attributed to the IBC’s overemphasis on the speedy resolution of bad loans over the recovery of maximum value from stressed assets
NPA Crisis

[op-ed snap] Reimagining financial reforms in India, 10 years after Great Recessionop-ed snapPriority 1


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Financial Stability and Development Council (FSDC), Financial Sector Legislative Reforms Commission (FSLRC), Indian Financial Code

Mains level: The reasons behind the global financial crisis in 2008 and how to prevent such events in future


Role of NPA in global financial crisis

  1. Until Lehman Brothers filed for bankruptcy on 15 September 2008, home loans going bad in some pockets of the US seemed like a small problem for the world
  2. It was a local issue unlikely to cause a problem even for the US economy
  3. Banking regulators, as well as governments, did not worry too much even if a bank had a lot of small loans on their books
  4. With the bankruptcy of Lehman Brothers and the unfolding of the Global Financial Crisis (GFC), it came to be understood that mis-selling of financial products to consumers can create risks to the entire financial system

How the crisis deepened?

  1. By banks giving loans for nearly the entire value of the house being purchased, assuming that when house prices rise, the loan could be repaid, they created a risk
  2. When lots of banks gave lots of such loans, they created a risk for the banking sector
  3. And, when they created derivative products of these loans that were bought and sold to many other financial institutions, both in the US and globally, they created risks for the global financial system
  4. Once house prices started falling, home loans started going bad
  5. Foreclosure under the US law, or simply handing over the keys of the mortgaged house to the bank and walking away was the most rational step for borrowers to take
  6. As banks’ books started going bad and they sold their sub-prime loans to other parts of the financial system, the problem became widespread

Financial products need to be regulated

  1. What we receive by buying a financial product is a promise by a financial firm to pay us sometime in the future
  2. If this promise is not fulfilled by the firm there may be sheer fraud
  3. The firm may also go bankrupt and the entire financial system may collapse

Changes in legislation

  1. The post-GFC period saw a major re-haul of the financial sector laws and regulatory architecture
  2. The Dodd-Frank Act in the US, a new regulatory architecture in the UK in the form of “twin-peaks model’’ towards furthering prudential regulation and conduct regulation of market participants are some examples
  3. Financial regulators in Britain, Australia and many other countries had already moved away from sectoral models of regulation—such as separate banking regulators, insurance regulators, pensions regulator and so on—to regulators who looked at the different businesses and arms of a financial company that could involve banking, insurance, derivatives etc
  4. These now also started setting up systemic risk regulators, or macro-prudential regulators and gave them new powers

Indian financial system

  1. The Indian financial system was much less developed compared to the sophisticated ones that witnessed the crisis
  2. It was at the other end of the spectrum, where instead of worrying about sophisticated derivatives products being traded, most derivative products have restrictions or are banned, and the bulk of the population has no access to bank loans
  3. But each regulator looking at risks in her sector was unable to see risks arising across the financial sector as a whole
  4. IMF advocated that only permanent capital controls like those in India and China could protect countries from capital surges and capital flight

Steps taken by India

  1. To address the issue of financial stability the government of India created a non-statutory council of regulators, the Financial Stability and Development Council (FSDC)
  2. To enable changes in the way financial regulations are made, the Financial Sector Legislative Reforms Commission (FSLRC), set up by the Government of India, proposed the Indian Financial Code—a blueprint of a comprehensive law to create a reformed financial regulatory framework
  3. Though the Indian Financial Code was not tabled in Parliament as a single piece of legislation, many elements of the law were implemented. These included
  • the merger of the commodities regulator (Forwards Market Commission) with the securities market regulator (Sebi),
  • the shift of regulation of non-debt capital flows from RBI to the Ministry of Finance and the setting up of an inflation targeting regime and a Monetary Policy Committee of the RBI

Way Forward

  1. Today, without a framework for bankruptcy and orderly resolution for financial firms, India faces the risk that if a large private sector bank goes bankrupt, there is no legal way of dealing with it other than to force a public sector bank or insurance company like the Life Insurance Company to buy it out
  2. To serve the growing needs of the economy for debt, equity, payment systems, and innovations in financial products and services it is required that regulatory reform is undertaken with much greater speed
NPA Crisis

Small loans could turn bad: RajanDOMRPrelims OnlyPriority 1


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: PMMY

Mains level: Problem of NPAs 



  1. Former RBI Governor Raghuram Rajan has cautioned that the next crisis in India’s banking sector could come from loans given to the unorganised micro and small businesses, called MUDRA loans, and credit extended through the Kisan credit card.
  2. MUDRA loans are offered under the Prime Minister Mudra Yojana launched in 2015 by the NDA government.
  3. A total of Rs. 6.37 lakh crore has been disbursed under the scheme by public and private sector banks, regional rural banks and micro-finance institutions till date, as per data from the MUDRA website.

Other Suggestions

  1. In a note on NPAs, Rajan said the government should refrain from setting ambitious credit targets or from waiving loans.
  2. Both MUDRA loans as well as the Kisan Credit Card, while popular, have to be examined more closely for potential credit risk.
  3. He also flagged the Credit Guarantee Scheme for MSMEs, run by the SIDBI calling it “a growing contingent liability” that needs to be examined with urgency.
  4. A large number of bad loans originated in the period 2006-2008 when economic growth was strong the banks are more prone to make mistakes.


Pradhan Mantri MUDRA Yojana

  1. PMMY is a flagship scheme of Government of India to enable a small enterprise come into the formal financial system and get affordable credit to run his/ her business.
  2. Any Indian Citizen who has a business plan for a non-farm sector income generating activity
  3. Credit need: Less than Rs 10 lakh
  4. Under the aegis of PMMY, MUDRA has already created the following products / schemes.
  • Shishu : covering loans upto 50,000/-
  • Kishor : covering loans above 50,000/- and upto 5 lakh
  • Tarun : covering loans above 5 lakh and upto 10 lakh
  1. There is no subsidy for the loan given under PMMY. However, if the loan proposal is linked some Government scheme, wherein the Government is providing capital subsidy, it will be eligible under PMMY also.

MUDRA Bank and its role in the MUDRA Yojana

  1. MUDRA Bank = Micro Units Development and Refinance Agency Bank
  2. The Rs 20,000 crore MUDRA Bank aims to provide refinancing to small and medium enterprises, particularly those from SC & ST
  3. The idea is to refinance micro-finance institutions through Pradhan Mantri Mudra Yojana
  4. This bank would be responsible for regulating and refinancing all MFIs which are in the business of lending to MSME
NPA Crisis

[op-ed snap] A perilous edgeop-ed snap


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Symptoms of Asian financial flu in Indian economy and measures that can be taken to stem it


More and more companies going bankrupt

  1. Indian industry is in meltdown
  2. Seventy-eight of the largest companies in India are facing dissolution under the Bankruptcy Code
  3. Twenty have been declared insolvent and sent to the National Company Law Tribunal for dissolution. Thirty more, all in the power sector, will also be sent to the guillotine
  4. Loan defaults by small companies have also doubled in the past year, signalling an imminent crisis in that sector as well

Is it only companies fault?

  1. Most of the companies on the chopping block had dared to invest in infrastructure projects
  2. The reason they did so was that the public sector was no longer doing it
  3. This concentration of failure in the most capital-intensive projects, and the sheer pervasiveness of the collapse shows that the cause is not confined to individual delinquents, but systemic
  4. A systemic collapse can only result from a systemic failure

RBI’s policy to be blamed

  1. In India, the RBI has dealt with it by imposing and then maintaining a regime of very high interest rates for industrial borrowers since 2010, regardless of the rate of inflation
  2. It did this when inflation measured by the time-honoured wholesale price index was 8 per cent
  3. It has persisted with this over the past four years when WPI inflation has been close to zero
  4. To justify this, three governors of the RBI in succession have argued that price stability will automatically lead to growth
  5. They have cited IMF staff papers and other studies that have claimed to show that high rates of inflation do not raise the rate of economic growth, but actually lower it

Need for inflation

  1. There is a compelling theoretical and empirical evidence that some inflation has to accompany industrialisation because it requires the diversion of a part of the income of the economy from producing consumer goods to capital goods
  2. South Korea had an average inflation rate of 21 per cent during the three decades in which it became an industrial powerhouse, and China has done so only with the help of stringent price controls on essentials

Why RBI targets inflation?

  1. A fundamental reason is imperative to keep the exchange rate stable
  2. This quest has not only killed the real economy but created an imbalance between India’s foreign exchange debt and its reserves that has brought international hedge funds into the Indian money market
  3. This has arisen because when the RBI raised the average domestic borrowing rate by 3 per cent in 2007-8 and did so a second time in 2010-11, it drove heavy industry and infrastructure companies to foreign capital markets, where unhedged loans were available for as little as 3 per cent
  4. Between 2008 and March 2015, around 300 of India’s largest companies borrowed Rs 4.5 lakh crore ($680 billion) abroad, mostly with maturity periods ranging from three to 20 years

Effect on Indian economy

  1. Between March 2014 and March 2015, borrowings increased by $181.9 billion
  2. This raised India’s outstanding external debt by 38 per cent to $580 billion
  3. A large part of the new debt was not hedged against the risk of a fall in the value of the rupee
  4. As a result, in 2015, 59 per cent of the $580 billion was vulnerable to devaluation
  5. What India is experiencing is a mild version of Thailand’s economic collapse in 1997, which triggered the “Asian financial flu”

How to stop further decline 

  1. The only way to stem the collapse is to lower the borrowing rate for loans with five or more years’ maturity to 4 per cent or less
  2. This will allow embattled infrastructure and heavy industries to refinance their loans and revive the demand for consumer durables and office equipment
  3. The revival of these sectors, and of housing, will greatly improve the viability of the massive restructuring of debt by the public sector banks in the past three years

Way Forward

  1. Every day that the rupee depreciates, increases the repayment obligations of companies loaded with foreign debt and weakens their capacity to respond positively to measures designed to revive economic growth
  2. One more attempt to avoid domestic collapse by propping up interest rates will bring on the foreign exchange crisis that the government is mistakenly trying to avert through monetary policy alone
NPA Crisis

Govt plans geo-tagging to crackdown on shell companiesPrelims Only


Mains Paper 3: Internal Security| Money Laundering

From UPSC perspective, the following things are important:

Prelims level: Shell companies, MCA21

Mains level: Issues associated with Shell companies and government action against them.


Geo-tagging of Companies

  1. Too many transactions in the same premises is the most noticed trend in investigations of shell companies.
  2. Hence Companies may soon have to geo-tag their registered offices in the statutory filings with the Registrar of Companies (RoC).

Benefits of Geo-tagging

  1. Geo-tagging will help in identifying clusters of companies with the same address.
  2. The ministry seeks to prevent abuse of the corporate structure by companies that inflate costs by issuing fake invoices and laundering unaccounted wealth in the form of loans or equity through bogus transactions.
  3. The coordinates of the registered premises will act as a key input for mining data in the ministry’s IT infrastructure, called MCA21.
  4. This will zero-in the companies with a common address, common contact numbers, common directors and sudden and unexpected changes in revenue, etc. that may warrant a closer look into their affairs.
  5. The idea is to seek the coordinates of the registered office at the time of incorporation in the case of new companies and at the time of filing annual returns in the case of existing ones.

Demonetization Impact

  1. After the November 2016 demonetization of high-value currency notes, the government combed through records to identify dormant companies and those that were used to launder money.
  2. In a clean-up exercise in 2017-18, the government struck off more than 226,000 such shell companies from the records for not filing annual returns for two or more years.
  3. Now, investigations are on into the real ownership of 68 companies that deposited ₹ 25 crore or more after demonetization, which the authorities have found suspicious.

Way Forward

  1. Having a common address alone does not point to wrongdoing.
  2. It is a practice among professional services companies such as law firms and audit firms to work from a large, common infrastructure.
  3. Geo-tagging will certainly help in identifying such clusters, but one has to keep in mind that some start-ups, too, opt to work in clusters.
  4. Having a common address is not illegal.
NPA Crisis

Limit for filing cases in Debt Recovery Tribunal doubledDOMRPrelims OnlyPriority 1


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: DRT

Mains level:  Resolving NPAs


Reducing Pendency in DRTs

  1. The central government has raised the pecuniary limit from Rs 10 lakh to Rs 20 lakh for filing application for recovery of debts in the Debts Recovery Tribunals by such banks and financial institutions.
  2. The move is aimed at helping reduce pendency of cases in the 39 DRTs in the country.
  3. As a result, no bank or financial institution or a consortium of banks or financial institutions can approach the DRTs if the amount due is less than Rs 20 lakh.

NPAs on decline

  1. According to RBI data on global operations (as on March 2018), an aggregate amount of Rs 3,98,671 crore was written off by banks over the last four financial years.
  2. Over the same period, their NPAs declined by Rs 2, 57,980 crore due to recoveries.

Mechanisms empowering Debt Recovery

  1. Banks and financial institutions recovery of dues takes place on an ongoing basis through legal mechanisms, which inter alia includes-
  • Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act
  • Recovery of Debts to Banks and Financial Institution (DRT) Act and Lok Adalats.
  1. The borrowers of such loans continue to be liable for repayment even when the loans have been removed from the balance sheet of the bank(s) concerned.
  2. To make the tribunals more effective and to facilitate disposal of debt recovery cases, the government has made several amendments in different laws, including the SARFAESI Act.


Debts Recovery Tribunals

  1. Debt Recovery Tribunals were established to facilitate the debt recovery involving banks and other financial institutions with their customers.
  2. DRTs were set up after the passing of Recovery of Debts due to Banks and Financial Institutions Act (RDBBFI), 1993.
  3. The Debts Recovery Tribunal (DRT) enforces provisions of the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993 and also Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002.
  4. Appeals against orders passed by DRTs lie before Debts Recovery Appellate Tribunal (DRAT).
  5. Section 3 of the RDDBFI Act empowers the Central government to establish DRTs.
  6. A DRT is presided over by a presiding officer who is appointed by the central govt. and who shall be qualified to be a District Judge; with tenure of 5 years or the age of 62, whichever is earlier.
  7. No court in the country other than the SC and the HCs and that too, only under articles 226 and 227 of the Constitution have jurisdiction over this matter.
NPA Crisis

[op-ed snap] Power play: on troubles of the power sectorop-ed snap


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Role of stalled power sector projects in rising NPAs & methods of their resolution


HC dismisses relief plea of power sector from NPA resolution

  1. The Allahabad High Court has dismissed a plea from private power producers seeking relief from an RBI diktat to banks to take cognisance of a stressed loan if repayments were missed even by a day
  2. Across the banking system, about 70 firms with loans of around ₹3.8 lakh crore outstanding were expected to face insolvency proceedings
  3. Thirty-four of the troubled accounts are from the power sector and constitute nearly 54% (or ₹2.02 lakh crore) of banks’ exposure in these cases

What does RBI mandate say?

  1. The RBI decision requires banks to complete insolvency resolution proceedings within 180 days of defaults
  2. Many companies breached the deadline this week

Reasons for the failure of power sector projects

  1. Fuel shortages due to the cancellation of coal block allotments or lack of supply linkages
  2. The absence of power purchase agreements signed by State discoms
  3. Cost overruns due to delayed clearances

Why is the resolution of NPAs from power sector difficult?

  1. A credible resolution plan may be difficult to construct unless key structural issues such as fuel supply and State discoms’ financial woes are fixed
  2. The utilisation rate of power plant capacities has been stagnant at around 60%

Why is HC decision a good signal?

  1. The High Court refused to entertain any obfuscation of the RBI’s regulatory powers or of the sanctity of the Insolvency and Bankruptcy Code to deal with stressed assets
  2. Granting any relief would have led to pleas for exemption from other sectors too

Way Forward

  1. The government should display greater urgency in tackling systemic issues in different sectors, but there should be no deviation from the IBC path it has embarked on to fix the banking stress, that is hurting the entire economy
NPA Crisis

Banks agree to resolve stressed assets quicklyPriority 1

Image Source


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Inter- Creditors Agreement

Mains level: NPA problem and measures for its resolution


Speeding up action on Stressed Assets

  1. Leading lenders of the country signed an agreement among themselves to grant power to the lead lender of the consortium to draw up a resolution plan for stressed assets.
  2. The plan would be implemented in a time-bound manner before bankruptcy proceedings kick in, as was the mandate of the Reserve Bank.
  3. The move comes after the RBI in its circular dismantled all the existing resolution mechanisms, such as the joint lenders’ forum, and asked lenders to start resolution for the asset even if the default was by one day.

Inter-Creditor Agreement (ICA)

  1. The agreement, known as Inter-Creditor Agreement (ICA) was framed under the aegis of the Indian Banks’ Association and follows the recommendations of the Sunil Mehta Committee (PNB) on stressed asset resolution.
  2. 24 public, private and foreign banks have signed ICA agreements under Sashakt to resolve stressed assets.
  3. Lenders including State Bank of India, Bank of India, and Corporation Bank have already signed the pact.
  4. The ICA has been executed by 24 lenders, primarily those who have obtained their board approvals.
  5. Other lenders and NBFCs are expected to execute the ICA shortly after getting approval from the respective Boards.

Massive step to resolve NPAs

  1. This resolution over dissolution approach will strengthen banks & businesses, protect jobs & help economy grow even faster.
  2. The ICA is applicable to all corporate borrowers who have availed loans for an amount of ₹50 crore or more under consortium lending / multiple banking arrangements.
  3. It had mandated that if the resolution plan was not finalised within 180 days, the account had to be referred for bankruptcy proceedings.

Working of the ICA

  1. The lender with the highest exposure to a stressed borrower will be authorised to formulate the resolution plan which will be presented to all lenders for their approval.
  2. The decision making shall be by way of approval of ‘majority lenders’ (i.e. the lenders with 66% share in the aggregate exposure). Once a resolution plan is approved by the majority, it shall be binding on all the lenders that are a party to the ICA.
  3. Dissenting lenders can either sell their exposure to another lender at a 15% discount or buy the entire exposure of all the banks involved, at a 25% premium.

Building consensus over a common resolution plan

  1. One of the major issues identified was a lack of consensus among the lending banks over a common resolution plan which would have helped in getting the asset back into the resuscitation mode rather than allowing it to impair over a period of time.
  2. ICA primarily focuses on the ₹50 crore-₹500 crore and the ₹500 crore-₹2,000 crore categories. If there are any specific assets of more than ₹2,000 crore, it will be dealt separately by ICA.
  3. The Mehta committee had estimated ₹2.1 lakh crore of stressed assets in the ₹50 crore to ₹500 crore category.
  4. The total stress in public sector banks is estimated at ₹10.6 lakh crore, as on March 31, 2018.
NPA Crisis

[op-ed snap] Cosmetic repair: on inter-creditor agreementop-ed snap


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Inter-creditor agreement, Project Sashakt

Mains level: Measures being taken to solve NPA crisis


Selling of assets easy

  1. Indian banks trying to sell their troubled assets now have one less hurdle to cross
  2. A group of banks, including public sector, the private sector and foreign banks, signed an inter-creditor agreement to push for the speedy resolution of non-performing loans on their balance sheets

Provisions of the agreement

  1. The inter-creditor agreement is aimed at the resolution of loan accounts with a size of ₹50 crore and above that are under the control of a group of lenders
  2. It is part of the “Sashakt” plan approved by the government to address the problem of resolving bad loans
  3. According to the agreement, a majority representing two-thirds of the loans within a consortium of lenders should now be sufficient to override any objection to the resolution process coming from dissenting lenders
  4. Minority lenders who suspect they are being short-changed by other lenders can now either sell their assets at a discount to a willing buyer or buy out loans from other lenders at a premium

How will the agreement be helpful?

  1. A disagreement between joint lenders is the biggest problem in resolving stressed assets
  2. The holdout problem, where the objections of a few lenders prevent a settlement between the majority lenders, will be solved through the inter-creditor agreement
  3. Such an agreement may persuade banks to embark more quickly on a resolution plan for stressed assets
  4. This is an improvement on the earlier model, which relied solely on the joint lenders’ forum to arrive at a consensus among creditors

Possible fallouts

  1. The obligation on the lead lender to come up with a time-bound resolution plan can have unintended consequences
  2. Banks may be compelled to engage in a quick-fire sale of stressed assets due to arbitrary deadlines on the resolution process
  3. This will work against the interests of lenders looking to get the best price for their stressed assets
  4. Also, it is often in the interest of the majority of creditors to take the time to extract the most out of their assets

Way Forward

  1. The biggest obstacle to bad loan resolution is the absence of buyers who can purchase stressed assets from banks, and the unwillingness of banks to sell their loans at a deep discount to their face value
  2. Unless the government can solve this problem, the bad loan problem is likely to remain unresolved for some time to come
NPA Crisis

Govt accepts 5-point plan to resolve NPAs, rules out bad bankPriority 1


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Scheme for Sustainable Structuring of Stressed Assets- Project Sashakt

Mains level: NPA problem and solution


The government agreed to a five-pronged strategy to resolve toxic loans, with the larger ones among them going to an asset management company (AMC) or an alternative investment fund (AIF).

I. Project Sashakt to resolve NPA crisis

  1. Finance minister accepted the report by a committee of bankers set up in this regard, that the strategy, called Project Sashakt.
  2. It will help retain the value of the asset through an operational turnaround.

II. No Bad Banks

  1. There is no proposal to create a bad bank, and Project Sashakt does not require any regulatory forbearance.
  2. A bad bank is a new company created to buy poorly-performing assets from another bank.

III. Project Sashakt outlines the resolution of bad loans depending on their size

  1. Bad loans of up to ₹50 crore will be managed by a focused vertical to be set up at the bank level itself, which will ensure the loan is resolved within 90 days.
  2. For bad loans of ₹50-500 crore, banks will enter into an inter-creditor agreement, authorizing the lead bank to implement a resolution plan within 180 days, which includes appointing turnaround specialists. If the lead bank does not complete the process in time, the asset would be referred to National Company Law Tribunal (NCLT).
  3. For loans above ₹500 crore, the committee has recommended setting up an independent AMC supported by institutional funding in stressed assets or an AIF.

IV. AMCs to consolidate Stressed Assets

  1. The idea is to help consolidate stressed assets under the AMC model for better and faster decision making.
  2. There can be more than one AMC, completely market-driven with small equity required.
  3. No capital is required from the government. Investors can come and invest. It would be an open process.

V. New role for NCLT

  1. Bigger loans which cannot be resolved through any of the above methods will be transferred to the NCLT for resolution under the Insolvency & Bankruptcy Code (IBC)
  2. The committee also recommended an asset trading platform for both performing and non-performing assets.
NPA Crisis

[op-ed snap] The government needs to handle public sector banks with careop-ed snapPriority 1


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: PCA by RBI, Recapitalization Plan, Insolvency and Bankruptcy Code

Mains level: The editorial discusses the difficulties in the operations of PSU Banks thereby creating NPAs


Low Confidence in the working of PSU banks

  1. PSU banks are grappling with a high level of bad loans, and a number of them have been put under RBI’s prompt corrective action and are not in a position to lend.
  2. In the March quarter, PSU banks booked losses in excess of Rs 62,000 crore and the total gross non-performing assets (NPAs) stood at about Rs 9 trillion.
  3. Although the government is in the process of recapitalizing state-run banks, it is likely that the current Rs 2.11 trillion PSU bank recapitalization plan will not be sufficient to put the PSU banks back on track.
  4. Since PSU banks own about 70% of banking assets, their inability to lend will have a direct impact on economic growth.

Fear of Investigation amongst CEOs

  1. Four out of 21 PSU banks have not appointed replacements for chief executive officers (CEOs) and top executives in nine more banks are expected to leave in the coming months.
  2. However, it is likely that the government will find it difficult to attract talent due to the fear of investigative agencies among bankers.
  3. A number of present and former senior executives are under investigation for past transactions ex. Chanda Kochar
  4. The government must ensure that investigations don’t become a witch-hunt, and that the issue is handled with utmost care.

Problem of Valuation of Stressed Assets and Capital Infusion Plan

  1. The government is now mulling the formation of asset reconstruction companies for faster resolution of bad loans and has constituted a committee to make recommendations in this regard.
  2. But the basic problem will be valuation of stressed assets.
  3. The ARC will need a significant amount of capital, which the government is not in a position to provide.
  4. In fact, now that India has the Insolvency and Bankruptcy Code in place, there is no need for the government to form an ARC. Banks should be able to resolve bad assets under this framework.

Lacking Governance reforms for PSU Banks

  1. The government has refrained from micromanaging PSU banks, but this in itself will not solve the problem.
  2. A situation where banks run without a CEO should never arise.
  3. PSU banks should be in a position to attract talent by offering competitive compensation at every level to be able to improve their operation and risk management systems.
  4. Only when banks are run by professionals will they be in a position to fund India’s growth in the long run and create value for all stakeholders, including the taxpayer.

The Way Forward

  1. At a broader level there should be clarity on the future of PSU banks.
  2. In fact, some of the banking reforms will only work if a clear roadmap is defined.
  3. For instance, if the government believes that a few banks should focus on under-banked areas, some financial support may be warranted.
  4. Perhaps banks should be allowed to focus on specific areas of strength so that they become more efficient over time and are not dependent on budgetary support for growth.
  5. It will be difficult to sustain higher growth without a strong banking system
NPA Crisis

RBI initiates work on Public Credit Registry


From UPSC perspective, the following things are important :

Prelims level : PCR, Deosthalee Committee Report

Mains level : Read the attached story


Mains Paper 3: Economy | Inclusive growth & issues arising from it

From UPSC perspective, the following things are important:

Prelims level: PCR, Deosthalee Committee Report

Mains level: Read the attached story


To help strengthen the credit culture in the economy

  1. To provide a single-point and real-time source for financial liabilities of a person or entity, the Reserve Bank of India has decided to set up a public credit registry (PCR) in a modular and phased manner.
  2. An Implementation Task Force (ITF) is being constituted by the Reserve Bank of India to help design undertake logistics for the next steps in the setting up of the PCR.

YM Deosthalee Committee Report

RBIs decision is based on the report of the task force which pointed out that credit information is spread over multiple systems in bits and pieces, making it difficult to get a comprehensive view of the financial liabilities of a person or entity.

  1. With a view to removing information asymmetry to foster the level of access to credit, and to strengthen the credit culture in the economy, there is a need to establish a PCR.
  2. The setting up of the PCR will consolidate all financial information about borrowers exists at present in silos and often impacts the time taken to get a loan, as well as the quantum of loan, sanctioned.
  3. A comprehensive credit information repository covering all types of credit facilities (funded and non-funded) extended by all credit institutions – commercial banks, cooperative banks, NBFCs, MFIs.
  4. Also covering borrowings from other sources, including external commercial borrowings and borrowing from market, is essential to ascertain the total indebtedness of a legal or natural person.
  5. It had also suggested that the registry should facilitate linkage to related ancillary credit information available outside the banking system, such as corporate balance sheet information and GSTN, depending on the legal provisions.
  6. However, it had recommended that the registry should NOT include elements of judgment such as credit scoring services and had also called for strict privacy guidelines.

Present Mechanism

  1. Within the RBI, CRILC is a borrower-level supervisory dataset with a threshold in aggregate exposure of ₹50 million.
  2. Whereas the BSR-1 is a loan-level statistical dataset without any threshold in the amount outstanding and focuses on the distribution aspects of credit disbursal
  3. Also, there are some privately-owned credit information companies in the country
NPA Crisis

No relaxation in new bad loan rules, indicates RBI


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Non-performing assets (NPAs), strategic debt restructuring (SDR), 5/25 refinancing, Scheme for Sustainable Structuring of Stressed Assets (S4A)

Mains level: Initiatives taken by RBI to tackle NPA problem

Norms regarding stressed asset resolution

  1. The Reserve Bank of India (RBI) seems to have ruled out relaxations in its new bad loan rules
  2. The new norms mandate banks to start the resolution process even if there is a default for one day

Impact of the rules

  1. In many cases, banks have to increase provisioning if the resolution is implemented
  2. They also mandate banks to report defaults weekly to RBI

New framework requirement

  1. Indian banks are sitting on a stressed assets pool of over Rs10 trillion, of which gross non-performing assets (NPAs) are Rs8.86 trillion
  2. The new framework aims to reduce the arbitrage enjoyed by borrowers in taking loans from banks compared with raising funds from markets
  3. The new framework has replaced earlier schemes such as strategic debt restructuring (SDR), 5/25 refinancing and Scheme for Sustainable Structuring of Stressed Assets (S4A)


Strategic debt restructuring (SDR) 

  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 the loan and has defaulted
  3. The SDR initiative can be taken by the group of banks or JLF that have given loans to the particular defaulted entity

Scheme for Sustainable Structuring of Stressed Assets (S4A)

  1. The S4A Scheme aims at a deep financial restructuring of big debted projects by allowing lender (bank) to acquire equity of the stressed project
  2. The scheme makes financial restructuring of large projects at the same time helping the lender’s ability to deal with such stressed assets
  3. It is intended to restore the flow of credit to critical sectors including infrastructure
  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. Under the S4A Scheme, banks would be to allow existing promoter to continue in the management even while being a minority shareholder. Whereas in the case of SDR, the promoter is delinked and ownership is changed
NPA Crisis

Banks face $3 bn write-off from PNB scam


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: NPA, Special mention accounts

Mains level: Banking frauds and provisions to deal with them

Repercussions of PNB scam

  1. The ₹12,700 crore Letters of Undertaking (LoU) fraud at the Punjab National Bank (PNB) could punch a bigger hole in India’s banking system
  2. The closure of businesses of loan-taking firms by investigative agencies is likely to result in another ₹8,000 crore of loans extended to them by banks turning into non-performing assets (NPAs)

RBI guidelines

  1. According to Reserve Bank of India (RBI) guidelines, banks have to write off the entire loan amount once a fraud has been reported

Status of loans and provisions

  1. Bankers said the loans to these companies were already in the second category of special mention accounts (SMA-2)
  2. If a loan repayment is due for over 60 days but less than 90 days, the account is accorded SMA-2 status
  3. If the dues remain unpaid for 90 days, it is classified as non-performing
NPA Crisis

RBI new bad loan rules may improve prospects of loan recovery


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

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


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
NPA Crisis

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


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.


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


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
NPA Crisis

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


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.


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?

  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


  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


  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
NPA Crisis

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


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


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


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
NPA Crisis

Govt seeks Parliament nod for Rs80,000 crore recap bonds

Image source


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

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


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
NPA Crisis

[op-ed snap] Testing timesop-ed snap

Image Source


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.


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


Twin balance sheet problem

NPA Crisis

RBI Financial Stability Report shows rising stress in agriculture and industry

Image source


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

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
NPA Crisis

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


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

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
NPA Crisis

[op-ed snap] Reveal, recognise, resolveop-ed snap


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.


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
NPA Crisis

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


 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.


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.

NPA Crisis

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


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




  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.



  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.


NPA Crisis

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


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.



  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
NPA Crisis

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

Image result for non performing asset

Image source


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



NPA Crisis

Report loan defaults in a day: SEBI

Image Source


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


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
NPA Crisis

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
NPA Crisis

Disclosure of names of big loan defaulters pointless: SCSC Judgements

  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
NPA Crisis

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

NPA Crisis

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
NPA Crisis

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
NPA Crisis

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
NPA Crisis

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%)
NPA Crisis

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
NPA Crisis

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
NPA Crisis

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
NPA Crisis

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
NPA Crisis

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
NPA Crisis

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
NPA Crisis

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
NPA Crisis

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
NPA Crisis

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
NPA Crisis

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
NPA Crisis

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
NPA Crisis

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
NPA Crisis

Clean up the Balance Sheet of Banksop-ed snap

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.
NPA Crisis

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.
NPA Crisis

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.
NPA Crisis

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.
NPA Crisis

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.
NPA Crisis

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.
NPA Crisis

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.
  • 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


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.

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.


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Nimisha Goswami

Very helpfull