Non-Performing Assets (NPAs) Management In Indian Banks

Abstract

Banks play a significant role in the growth and stabilization of the economy as they both are interlinked. After the nationalization of banks in India, the economy started to grow at a slow rate due to the increased cost of maintenance as the loans were given at a reasonable rate. Although utmost care was taken by the banks and the government, many assets and loans stopped generating income and turned into bad debts. These bad debts are termed as non-performing assets. A major issue faced by the banks in India is the rise of bad debts or non-performing assets (NPAs). This paper focuses on examining the reasons behind non-performing assets, their impact on the economy, and how banks work to implement various reforms to stabilize banking activities and avoid periodic up-downs in the economy. The study further focuses on various strategies implemented by the central and commercial banks to tackle the problem of rising Non- Performing Assets such as the SARFAESI Act, Debt Recovery Tribunal (DRT), Asset Quality Review (AQR), Corporate Debt Reconstructing (CDR), Joint Lenders Forum (JLF), Insolvency and Bankruptcy Code (IBC), and more. The act of Asset Quality Review has shown the reality of NPAs in the banking sector along with the reason behind the downfall in the banking sector. The paper focuses on the trends of the NPAs in the nation over the past few years along with whether the formation and implementation of different strategies by the banks have been successful or not. It tried to provide a few suggestions to the stakeholders considering the rise of NPAs in the Indian economy.

Introduction

Banking Sector and Non- Performing Assets

Banks are the significant drivers of growth and stabilization of the developing economies. The major role of banks is to accept deposits from the ones who wish to save and lend those deposits further in the form of loans for the development of the economy. For a healthy and growing economy, an effective banking system is required. 

The first wave of nationalization of banks in India took place in 1969. It led to a rise in the cost of maintenance and a reasonable rate of interest was charged on loans. Various assets and loans stopped generating income even after the steps taken by the government. Those loans turned to NPAs and brought disturbance in the banks. 

Bank’s gross non-performing assets as a percentage of total loans have risen over the past few years, rising from 2.3% in 2008 to 9.3% in 2017. The functions of the banks were affected due to the continuous rise in NPAs and their ability to lend loans was reduced due to a fall in the profitability, ceasing to produce income for the bank. Over the years, RBI has taken various measures to manage and reduce NPAs. Several revisions were done to bring down the percentage of NPAs. The RBI established a strict 180-day deadline for the implementation of a resolution plan in the revised framework. If this deadline is not met, stressed assets must be referred to the NCLT under the IBC within 15 days.

NPA Analysis

The NPAs are loans where the installment of the principal remains overdue for more than 90 days. NPAs are one of the indicators to measure the health and condition of the banking system and financial institutions. The problem of NPAs leads to the loss of sentiments of lenders, investors, and depositors. Due to the loss of trust of depositors and shareholders in the banks, there may be a withdrawal of deposits.

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