- The issue of non-performing assets in India has become a topic of extreme importance and discussion.
- This situation was worsened with the Yes Bank being on the brink of fragmentation. Compared to its earlier situation, with the help of the RBI, its condition is much better with the ensured security of the public money.
- According to the report released by the Standing Committee on Finance, the Bank's lending capacity has been severely affected by the rate of non-performing assets and bad loans.
- With increasing NPAs over the years, the RBI has issued various guidelines aimed at the alleviation of the impediment.
- The NPA ratio has further increased by covid-19, heralding unprecedented times in every way.
What is a non-performing asset and what are the consequences?
- A non-performing asset is a loan or advance for which the principal payment remains unpaid for a period of over 90 days.
- About 85% percent of the NPAs are from loans and advances from the public sector banks.
- At the turn of the millennium, the figures have not plummeted; Instead, the gross NPAs of the banks have increased from 2.3% of the total loans in 2002 to 9.3% in 2017.
- This indicates that an increasing proportion of loans are not able to bestow the banks with the normal profit it requires, lowering their income and ability to provide further credits.
- The stress in the banking sector causes less money available for funding other projects.
- NPAs also play a decisive factor in determining the rate of income and in maximizing the distribution to all spheres of the society.
- With a factor of uncertainty hovering upon the anticipated future losses, a portion of the net income is required to be set aside.
- This acts as a pivotal element in affecting the ratio of the bank’s net profits to its net assets ( Return on Assets).
- Another element that poses a problem is the inefficiency of the information available on the working of the banking sector. Several public and private banks have faced the dire consequences of increasing bad loans.
- Much of this information is not disseminated that risks the security of the assets. In a nutshell, the citizens are not adequately informed about the ongoing events.
What steps are being taken to address the growing problem?
- NPAs cease to get income and returns; if they are not forbidden correctly and systematically, then the effects are detrimental to sustain the banking sector.
- According to section 45, the power of the Reserve to apply to the central government for the suspension of a business by a banking company and to prepare a scheme of reconstruction or amalgamation helps to revive the ratio.
- The central bank’s Financial Stability Report ( FSR) states that the NPA ratio could jump to as high a level as 14.7% in this period of severe stress.
- RBI has announced various measures to support the sinking economy aiming at boosting growth and easing the stress of banks and financial sectors.
- Credit Risk Management has been given the utmost importance; the creditworthiness of the borrower and their skills and experience must be taken into consideration.
- Asset Reconstruction Companies must be set up as they prove to be beneficial in alleviating the stress in the banking sector.
- With an urgent need to tighten the bank’s internal and external audit systems, Asset reconstruction Companies can overcome the situation feasibly and systematically.
- While the primary function of a bank is to lend, wary of NPAs, stricter management must be implemented to make the situation better.
This article has been written by Jahnavi Rathore for The Paradigm
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