Introduction
Banking is one of the most essential sectors which help in pacing the economic growth of any nation, it functions in providing services including giving interest on balance as well as giving loans on minimal interest to the citizen for different purposes and to corporate sectors as well. But the problem arises when banks have to suffer losses due to unpaid loans in the expected time. Some of such unpaid loans were declared as NPAs and which ultimately put the overall banking sector under stress. Alike PSBs, private sector banks are also suffering due to NPA, however, they are more successful in managing NPA. Increasing overall NPA affects the banking sector badly which is visible in economic growth. RBI regulates and keeps check upon the functioning of the banks, and it has a function of summing up the overall economic condition of the nation through reports. RBI has estimated a rise in GNPA of public sector banks from 11.3 % in March 2020, to 15.2% in March 2021, the obvious reason cited is COVID-19, which has certainly affected the employment, which ultimately. This pandemic has forced the government to deliberately mold its plans from reducing the NPA to provide additional monetary aid to prevent economic crunch.
Banking Sectors in India
History: The growth of modern banking in India can be traced back to the 18th century, where the bank of Bombay was establishedin 1720.[1] Gradually, the bank of Calcutta, which was established in 1806, which later renamed as the bank of Bengal. The three apex banks bank of Bombay, Madras, and Bengal were merged to form the Imperial Bank of India in 1921, which became the State Bank of India in 1955.[2] To guarantee the reach of Banks in the whole country, 14 commercial banks were nationalized in 1969, and later, 6 more banks were nationalized in 1980.[3]
RBI: Reserve Bank of India (RBI) was established in 1935 by the enactment of the act Reserve Bank of India Act, 1934. Originally it had private ownership but after its nationalization in 1949, it came under the central government’s ownership. The basic functions of the RBI are described by its preamble, which includes: (i) regulation of banknotes and keeping reserves; (ii) securing monetary stability; (iii) operation of currency and credit system; (iv) formation of modern monetary policy; and (v) maintaining price stability, sticking to the objective of growth.[4]
PSBs:These banks are scheduled commercial banks owned by the government. Before, liberalization the whole banking sector had the government’s monopoly, but liberalization opened doors for foreign as well as private banks. PSBs include SBI as well as its subsidiary banks, nationalized banks, and other government banks.[5]
Concept of NPA
The Credit system is one of the methods by which banks earn. They give credit in the form of loans for different purposes of people as well for industries on interest rates. Farmers and Industrialists are two major beneficiaries of this credit system, by these aids they invest in their respective businesses and after a certain time, they are obliged to return the debt with a certain interest. When such a person fails to return either principal money or interest money, then such loans are considered as bad loans, which later are termed as Non-performing assets (NPA). RBI has defined NPA as “An asset, including a leased asset, which ceases to generate income for the bank”.[6] NPA is a bad loan for whose principal or interest amount is overdue for 90 days period. Banks qualify NPAs as given below:[7]
- Substandard assets: Assets that have NPA for 12 months or lesser.
- Doubtful assets: Assets that remained in the category of substandard assets for 12 months.
- Loss assets: Assets when declared uncollectible, and which cannot be regarded as bankable assets for the banks. Though some types of recovery values might be available.
The recovery of losses due to NPAs remains a significant challenge for the banks, though NPAs are tried to be minimized by the collateralizing the asset of defaulters, and restructuring loans somehow helps slightly in decreasing the loss due to complete default.[8]
Analysis
The increasing NPA affects the overall functioning of the bank, primarily it causes loss to the bank which causes a change in different policies. After having high NPA, banks have to reduce interest rates upon deposits and increase that on loans, affecting the banking business. This affects the confidence of investors, which affects the share prices of the bank. These effects may turn deadly for the bank.[9]
FSR Report: To keep a check upon the NPA of the banking sector, RBI issues Financial stability report(FSR) twice a year, FSR represents the assessment of the sub-committee of the financial stability and development council (FSDC) and it also points out the issues in development and regulation of the financial sector.[10] For actual (pre-COVID-19) assessment of NPAs on the banking sector, the FSR report published in December 2019 is taken for reference. The report cites the GNPA ratio of scheduled commercial banks (PSB + Private) at 9.3% until September 2019, which was supposed to increase by up to 9.9% by September 2020.[11]
World Rankings: On the world level, according to 2018 data of the Global Economy, Highest NPA was of San Marino at 53.02% and India ranked 27th at 9.46%, whereas Monaco remained with the least NPA at 0.22%.[12] In comparison to Asian Countries, India was held to the third-highest NPA holder after Lebanon and Bangladesh.[13]
PSBs v. PVBs: If we consider the same FSR report, the GNPA of PSBs has decreased from March 2018 and is at 12.7% in September 2019. Whereas, the GNPA of private banks (PVBs) didn’t show much variance and remained at 3.9% in September 2019.[14] The sheer difference of NPA between PSBs and PVBs is notable here, which certainly is the reflection of their policies.
The primary reason for increasing NPAs has been cited to be deficient credit and recovery mechanism. Apart from the primary reason, the different procedures of PSBs regarding extension and monitoring the credit might be the reason for larger NPAs. PSBs keep the interest rates lesser on loans as well as provide a longer period for loan repayment keeping the installments lower and the process of procuring is very inefficient. The hypothecation of a borrower’s single asset in multiple loans is one of the major issues.The verification of the loan application and recovery mechanism of the loan is not robust. The unwillingness of PSBs to repossess the assets of borrowers on default due to political benefits as well as loan waivers are causing the rise in NPA in PSBs.[15]
Govt’s Stance: Present government has been able to bring a fall in NPA of PSBs during the financial year 2018-19, which recorded a decline of Rs. 89,189 crores to bring it at Rs. 8.06 Lakhs. Finance Minister cited RBI to point out excessive lending, deliberate defaulters, corruption cases, and the slowdown as the primary reason for such increased NPA in PSBs. Further, she praised the strategy of 4Rs (Recognition, Resolution, Recapitalization, and reforms) for this decline.[16] Indradhanush program was the government’s bank recapitalization plan, which was criticized by India Ratings and Research stating that this program will help PSBs to build their capital and reduce their losses, but that will be a temporary improvement, and the requirement of capital will be more in next stress cycle.[17]
COVID-19 impact
The COVID-19 has impinged almost the maximum of the countries, which has resulted in a global slowdown, it has also severely affected the Indian economy. According to the forecast of the World Bank, India’s GPD is going to contract by 3.2% in 2020-21, which will be lesser than that in 2019-20. The forecasted decrease suggested further depreciation in income and an increase in unemployment.[18]
RBI data and forecasts: The FSR of June 2020, amidst the pandemic, assessing the situation of SCBs till March 2020, the NPA has decreased from 9.3% in September 2019 to 8.5 % in March 2020, whereas the NPA in PSBs have also decreased from 12.7% in September 2019 to 11.9% in March 2020. Further, RBI has projected the NPA atNPA of SCBs are projected ranging at 12.5-14.7% in March 2021 at different stress levels and has projected NPA of PSBs ranging at 15.2-16.3% in March 2021.[19]
Govt Actions: The actions of financial regulators along with the central government has eased certain constraints as well as maintained market integrity. The timely economic packages of 20.97 Lakh Crore, which is claimed of being ‘10% of GDP’ sized, announced by the government has helped in easing the asset risk but is not sufficient to overcome the extent of the loss incurred due to this Pandemic.[20] The RBI during these tough times has extended the classification of asset standstill from March 1, 2020, to 31st May 2020, which means the period for NPA recognition will be 180 days instead of 90 days. This will reduce the financial burden on banks.[21]
Recommendations
NPAs being financial stress not only for the banks but for the economy at large, should be controlled by financial regulators and governments. Even after the enactment of The Insolvency and Bankruptcy Code (IBC) in 2016, the Asset quality review (AQR) should be made more frequent to keep a check on balance sheets of the corporates and banking sectors. The resolution under the IBC might reduce the value of collateral leading to further loss to creditors. The debt restructuring into non-convertible debentures (NCDs) and Equities, the former turns into beneficiary for the debtor and the later is not so good for creditors, so this model of restructuring should be improved. The burden of restructuring of debts should not fall on banks completely, rather borrowers should also be involved in this.[22]
Countries such as Japan and China have a well-structured asset reconstruction and recovery mechanism which lacks in India. Further, the loan waivers provide political benefits but do severe damage to PSBs.
Conclusion
NPAs has been a concern for the whole banking sector not only in India but in the whole world, an unpopular country like Monaco, Hongkong along with Major nations like Japan has been successful in keeping the NPAs under control, India has been ranked 27th out of 125 nations having highest NPAs. In India, NPA in PSBs has been relatively higher than that in PVBs. The reason being the efficient credit system of PVBs along with their restructuring and recovering policy. The PSBs are required to bring changes in their procedure as well as RBI and the government needs to make policies to curb willful defaults. Loan waivers to gain political benefits in India have been a practice in the last few decades which is needed to be prevented. Now, as the pandemic has caused an utter imbalance in the world economy, the primary objective of the governments is to save more lives as well as inject monetary aids to keep the economy of the nation moving.
By-
Adarsh Kumar
[1] The advent of Modern Banking in India (1720-1850s), Reserve Bank of India (Aug. 9, 2020, 02:17 AM),
https://www.rbi.org.in/scripts/ms_banks.aspx.
[2] Evolution of SBI, SBI (Aug. 9, 2020, 02:33 AM), https://www.sbi.co.in/web/about-us.
[3] Stanly Chirayath, Banking System in India, Lopo.org (Aug. 9, 2020, 02:37 AM),
https://www.lopol.org/article/banking-system-in-india.
[4] Organization and Functions, Reserve Bank of India (Aug. 9, 2020, 07:52 PM),
https://www.rbi.org.in/Scripts/AboutusDisplay.aspx#Subsidiaries.
[5]Chirayath,Supra(note 3).
[6] Glossary, Reserve Bank of India (Aug. 10, 2020, 01:31 AM), https://www.rbi.org.in/Scripts/Glossary.aspx#Capital.
[7] Definition of ‘Non Performing Assets’, The Economic Times (Aug. 10, 2020, 01:39 AM),
https://economictimes.indiatimes.com/definition/non-performing-assets.
[8] Alicia Tuovila, Non-Performing Asset (NPA), Investopedia (Aug.10, 2020, 02:33 AM),
https://www.investopedia.com/terms/n/non-performing-assets.asp.
[9] Amit Bansal, Effect of NPA (Non–performing Assets) in Banking Sector, Financial Control(Aug.11, 2020, 12:13 AM), https://financialcontrol.in/non-performing-assets/
[10]Yogesh Dayal, RBI releases December 2019 Financial Stability Report, Reserve Bank of India, Dec. 27,2019, page 1.
[11] Ibid, Page 1-2.
[12] Non-performing loans – Country Rankings, TheGlobalEconomy.com (Aug.10, 2020, 11:43 PM),
https://www.theglobaleconomy.com/rankings/nonperforming_loans/.
[13] Non-performing loans in Asia, TheGlobalEconomy.com (Aug.10, 2020, 11:55 PM),
https://www.theglobaleconomy.com/rankings/nonperforming_loans/Asia/.
[14] Financial Institutions: Soundness and Resilience, Finance Stability Report December 2019, 27 December 2019, Page 26, 27.
[15] Charan Singh, “Why are NPAs higher in public sector banks?”, Business Standard (Aug.11, 2020, 01:37AM),
https://www.business-standard.com/article/opinion/charan-singh-why-are-npas-higher-in-public-sector-banks-114051901183_1.html.
[16] Chitranjan Kumar, Modi government’s ‘4R’ strategy to resolve the NPA crisis shows results; bad debt reduces by Rs 89,189 crore, Business Today, Jun.25, 2019.
[17] Shayan Ghosh, Bank recap plan Indradhanush failed to meet objectives, says India Ratings, liveMint (Aug.11, 2020, 02:30 AM), https://www.livemint.com/industry/banking/bank-recap-plan-indradhanush-failed-to-meet-objectives-says-india-ratings-1565320108994.html.
[18] Global Economic Prospect- June 2020, World Bank Group, Jun.08, 2020, Page- Page 4.
[19] Financial Institutions: Soundness and Resilience, Finance Stability Report July 2020, 24 July 2020, Page 23, 28.
[20] Government’s economic package only 1% of GDP, say, analysts, The Times of India (Aug.11, 20202, 12:04 PM),
https://timesofindia.indiatimes.com/business/india-business/govts-eco-package-only-1-of-gdp-say-analysts/articleshow/75837840.cms.
[21]Reserve Bank tries to reduce the NPA burden for lenders in coronavirus crisis, Business Standard, (Aug.11, 2020, 12:34 PM),https://www.business-standard.com/article/economy-policy/reserve-bank-tries-to-reduce-npa-burden-for-lenders-in-coronavirus-crisis-120041700644_1.html.
[22] Barendra K. Bhoi, The way ahead for dealing with NPAs, The Hindu Business Line (Aug.11, 2020, 01:03 PM),
https://www.thehindubusinessline.com/opinion/the-way-ahead-for-dealing-with-npas/article27198338.ece#.
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