Economic Environment

Growing Non-Performing Assets in the Banking Sector – Is there a way out?

Exploring Remedies for India's Banking Sector
Index

Introduction........................................................................................................................................................... 3

Question 1: What is Non-Performing Assets (NPA)? (Definition used in India) ............................................... 4

Question 2) Track the long-term trends in NPAs in India including sector-wise contribution to NPAs. Also,
provide an international comparison. – Prashant Pai (EPGP10KC098) (Please compress to 2 pages as per
instruction, also please see if there is any part which is relevant to Q3 and included by Roshan which can be
excluded or compressed) ...................................................................................................................................... 6

Question 3) What led to the rise in NPAs in India over time?

Question 4) What are the consequences of high NPAs on the Indian economy? .............................................. 12

Question 5) What are the policy actions taken to address the problem of growing NPAs in India? What
changed recently in the RBI’s guidelines to banks on NPAs? – (Please try to compress in two pages and add
source of info in reference section) .................................................................................................................... 14

Question 6) What are the various solutions proposed by experts to address the problem of NPAs in India? Can
a ‘bad bank’ solve India’s growing NPA crisis? ............................................................................................... 17

Question 7) Field visit: Meet top officials of a commercial bank (public or private) and discuss the issue of
growing NPA in depth. Understand the causes and consequences of rising NPAs, the challenges involved in
resolving the problem, and possible solutions to the problem from the official. Include the findings of this
exercise in your project report. - ........................................................................................................................ 19

References........................................................................................................................................................... 22

Acknowledgement .............................................................................................................................................. 22

"Banking is a very peculiar business. It's the only one where, if you're lending money, your customer is
saying, 'I don't want to pay you.'" — Jamie Dimon
Introduction

In recent years, the banking sector in India has found itself grappling with a steadily escalating concern – the
proliferation of Non-Performing Assets (NPAs). As of March 2023, the total NPA stock in India's banking
system surpassed 10.3 trillion rupees, underscoring the urgency of addressing this intricate issue. This
alarming figure has garnered the attention of financial experts, policymakers, and stakeholders alike, sparking
essential questions about its origins, consequences, and potential solutions.

This study delves into the heart of this matter, aiming to dissect the multifaceted facets of NPAs and their
implications for the Indian economy. By meticulously examining historical trends, sector-wise contributions,
and international comparisons, this exploration seeks to unearth the driving forces behind the relentless rise of
NPAs in the Indian context. For example, the NPA ratio of Indian banks has increased from 2.5% in 2008 to
9.8% in 2018.

Moreover, it endeavors to shed light on the policy measures and recent shifts in regulatory guidelines initiated
by the Reserve Bank of India (RBI) to curb this alarming trend. The RBI's recent modification of guidelines
concerning NPAs on June 1, 2023 reflects a concerted effort to tackle this challenge head-on. Through rigorous
analysis, the study evaluates expert-proposed solutions, including the concept of a 'bad bank,' as potential
remedies to address this pressing crisis.

A comprehensive field visit to engage with key officials from commercial banks provides invaluable insights
into the challenges and potential resolutions at the ground level. As the study concludes, it reflects on the larger
policy implications and the fundamental question: Can India effectively surmount the NPA challenge without
impeding its economic growth? Join us in this investigative journey as we endeavor to unravel the intricacies
of NPAs, seeking a way forward for India's banking sector."
Question 1: What is Non-Performing Assets (NPA)? (Definition used in India) –

Answer 1 : A Non-Performing Asset (NPA) is a loan or advance that a borrower has not repaid for more than
90 days. In other words, an NPA is a loan that has gone unpaid for 3 months or more.

The Reserve Bank of India (RBI) classifies NPAs into three main categories:
A Non-Performing Asset (NPA) is a loan or advance that a borrower has not repaid for more than 90 days. In
other words, an NPA is a loan that has gone unpaid for 3 months or more.

The Reserve Bank of India (RBI) classifies NPAs into three main categories:

● Substandard assets: These are assets that have remained as NPAs for a period less than or equal to 12
months. These assets show signs of weakness, but they are not yet classified as bad loans.
● Doubtful assets: These are assets that have remained in the substandard category for more than 12
months. These assets have a higher degree of uncertainty, and it's doubtful whether the bank will be able
to recover the full value of the loan.
● Loss assets: These are assets where the loss has been identified by the bank, internal or external auditors,
or the RBI inspection, but the amount hasn't been fully written off yet.

The RBI mandates banks to set aside provisions (reserves) to cover potential losses from NPAs. The amount of
provisions depends on the classification of the NPA.

NPAs are important for several reasons:

● Risk management: NPAs indicate the health of a bank's loan portfolio. High levels of NPAs can weaken
a bank's financial stability and ability to lend further.
● Regulatory compliance: RBI guidelines mandate banks to set aside provisions (reserves) to cover
potential losses from NPAs. The amount of provisions depends on the classification of the NPA.
● Financial reporting: NPAs impact a bank's financial statements, affecting metrics like profitability,
capital adequacy, and asset quality.
● Credit availability: High levels of NPAs can limit a bank's capacity to extend new loans, as it needs to
maintain a certain level of capital adequacy and avoid excessive risk exposure.

NPAs can be managed through a variety of measures, including:

● The relationship between the bank and the borrower: The bank should consider the relationship it has
with the borrower when deciding on a course of action. For example, if the borrower is a long-standing
customer with a good track record, the bank may be more willing to work with them to restructure the
loan.
● The collateral available: If the loan is secured by collateral, the bank may be able to recover some of its
losses by selling the collateral. However, if the collateral is not sufficient to cover the outstanding
amount of the loan, the bank may still incur losses.
● The cost of recovery: The bank should also consider the cost of recovery when choosing a course of
action. Legal action can be expensive and time-consuming, and it may not always be successful.
● The impact on the bank's reputation: The bank should also consider the impact of NPAs on its reputation.
If the bank is seen as being lenient with borrowers who default on their loans, it may lose the trust of its
customers.

Here are some examples of NPAs in India:

 ● A loan that has not been repaid for more than 90 days.
● A loan that has been restructured, but the borrower is still not making the required payments.
● A loan that has been guaranteed by a third party, but the guarantor is unable to repay the loan.
● A loan that has been written off by the bank.

The Insolvency and Bankruptcy Code (IBC) is a legal framework for dealing with corporate insolvency. It
provides a mechanism for resolving stressed assets and NPAs through a process of liquidation or reorganization.

The IBC has been effective in reducing the level of NPAs in India. In the financial year 2022-23, the gross NPA
ratio of scheduled commercial banks (SCBs) fell to 3.9%, the lowest level in a decade.
Question 2) Track the long-term trends in NPAs in India including sector-wise contribution to NPAs. Also,
provide an international comparison.

(Please compress to 2 pages as per instruction, also please see if there is any part which is relevant to Q3 and
included by Roshan which can be excluded or compressed)

Long-Term Trends in NPAs in India:

As per the definition of NPAs given above, these are the bad loans that are not being repaid by borrowers which
to the banks and financial institutions going into losses/bad Debts. NPAs were always been a significant concern
for India's banking sector. Following long-term trends in NPAs in India:

Following fig. shows the Banking sector soundness indicators as published by RBI.

Let’s have the insights in 2 phases:

For the period before 2010:

NPAs were relatively low, and the banking sector was performing well. (in 2002 NPA was 11%, please review)

For the period After 2010:

NPAs started to show an increase due to factors pertaining to economic slowdown, Government policy issues
and corporate governance problems.

The Indian economy faced challenges like stalled projects and issues in sectors like infrastructure, power, and
steel. NPAs showed a significant spike between period of 2015 and 2018 and become a major worry for the
banking sector.
In this scenario, The Reserve Bank of India (RBI) came up with Insolvency and Bankruptcy Code (IBC) as a
measure to address the situation. The efforts continued further from 2019 to 2021 by adding measures like
recapitalization of banks in order to strengthen their balance sheets.

As per the report published by RBI, the Gross and net NPA ratios have fallen from 11.5 per cent and 6.1 per
cent in March 2018 to 3.9 per cent and 1.0 per cent in March 2023 respectively, which is lowest reported number
in last in past 10years.

Sectors contributing NPAs: (Please include some data like name of industry and quantum of NPA or pie
chart if available)

The topmost sectors with the contribution towards banks NPAs are steel, textile, power, telecom and
infrastructure that contributes to almost 60%.

Steel: This sector was hit by factors like overcapacity, frequent changes in raw material prices and almost no
demand in the market contributes to NPA.

Textiles: Factors like change in consumer preferences, supply chain disruptions impacted the textile sector that
leads to contributing to NPAs.

Power: Factors like fuel supply issue, regulatory changes and financial pressure on power distribution
companies (DISCOMs) contributes to NPAs in this sector.

Telecom: This sector faced the financial crisis due to severe market competition, huge spectrum costs and heavy
debts, that contributes to NPAs.

Infrastructure: This sector which is responsible for road projects, highways, ports and other public works,
faced challenges like delays in project execution, regulatory uncertainties, funding challenges, etc. that
contributed to NPAs.

Other sectors that are the also the contributors to some extent as follows:

Agribusiness: Agricultural loans contributes to NPAs due to factors such as crop failures as a result of
unfavorable weather conditions and changes in market prices.

Aviation: Due to heavy price competitions and huge operating costs, aviation sector is going through financial
burden. Also, regulatory changes add up more to it. Due to these financial pressures, this sector is a contributor
of NPA.

Real Estate: This sector contributes to NPAs due to the financial stress in this sector because of irregularities
in demands, delays in project execution, land acquisition and project approvals.

Even though these sectors have contributed NPAs, the conditions can be changed by addressing and taking
appropriate measures with evolving economic conditions, policy changes and sector-specific facing issues.

International Comparison: (Please add data related to country wise NPA % )

Here is a general overview of NPAs in India when compared to some other countries:

India:
India has faced challenges with a significant level of NPAs in its banking system, particularly in the public
sector banks.

Factors contributing to high NPAs in India included economic slowdowns, issues in various sectors like
infrastructure and steel, and corporate governance concerns.

The Indian government and the Reserve Bank of India (RBI) implemented various measures, including the
Insolvency and Bankruptcy Code (IBC), to address the NPA problem.

China:

China has also faced NPA challenges, especially in the aftermath of the global financial crisis. Its banking
system has seen a buildup of bad loans due to excessive lending to state-owned enterprises and local
governments.

The Chinese government has implemented initiatives to address NPAs, such as debt-for-equity swaps and
restructuring of state-owned enterprises.

European Union:

Several countries in the European Union faced NPA issues following the global financial crisis, particularly in
the aftermath of the European sovereign debt crisis.

The European Central Bank (ECB) conducted stress tests on banks to assess their resilience against economic
shocks, including NPAs.

Countries like Italy, Spain, and Greece were among those with higher NPA ratios in their banking systems.

United States:

During the global financial crisis, the United States experienced a surge in NPAs due to the collapse of the
housing market and the subsequent financial turmoil.

The Troubled Asset Relief Program (TARP) was introduced to stabilize financial institutions and address the
NPA problem.

International Comparison Considerations:

When comparing NPAs across countries, consider the following factors:

Economic Conditions: Economic growth, recession, or recovery can influence NPA levels.

Regulatory Framework: Different countries have varying regulations for classification, recognition, and
provisioning of NPAs.

Reporting Standards: Differences in reporting standards can affect the accuracy of NPA data.

Banking System Structure: The role of public and private sector banks, as well as the presence of foreign
banks, can impact NPA levels.

Government Interventions: Government policies, regulatory interventions, and resolution mechanisms play a
role in managing NPAs.
Question 3) What led to the rise in NPAs in India over time? –

What led to the rise in NPAs?

The rise of Non-Performing Asset (NPA) of banking sector in our country has become a security concern. The
root cause or the main reason of which is 2008 Global financial crisis. NPAs have jolted the entire Indian
banking sector and thus have grabbed the attention post- liberalization of the financial sector. NPAs basically
reflect the performances of banks and are the primary indicators of credit risk. The Reserve Bank of India (RBI)
released guidelines for banks in February 2018 regarding timely resolution of stressed assets have come under
scrutiny, with multiple cases being filed in courts against the same.

Key information
India Non-Performing Loans Ratio stood at 5.8 % in Mar 2022, compared with the ratio of 7.3 % in the previous
year and 11.182 % in year 2018.

As per latest update on NPS the

Gross and net NPA ratios have
fallen from a high of 11.5
percent and 6.1 percent in
March 2018 to 3.9 per cent and
1.0 percent in March 2023
respectively which is impressive
recovery.

Source: CEICDATA.COM II Reserve Bank

Findings: of India
There are many factors that lead to increased occurrence of NPAs. These are few external as well as internal to
the Indian banking sector.
External factors are like decreases in global commodity prices leading to slower exports Etc.

Internal Factors:

Credit Boom
One of the root causes of non-performing assets (NPAs) issue in Indian banking sector is 2008 global financial
crisis. Many loans currently classified as NPAs, originated in the mid-2000s, at a time when the economy was
booming, and business outlook was very positive. Large corporations were granted loans for projects based on
forecast of their recent growth and performance. Since loans were available more easily than before,
corporations grew highly leveraged, through external borrowings rather than internal promoter equity. But as
economic growth slowed down because of the global financial crisis of 2008, the repayment capability of these
corporations decreased. This contributed to what is now known as Twin Balance Sheet problem, where both the
banking sector (that gives loans) and the corporate sector (that takes and has to repay) have come under financial
stress.
When the project for which the loan was taken started underperforming, borrowers lost their confidence and
capability of paying back the bank. The banks at this time took to the practice called ‘evergreening’, where fresh
loans were given to some promoters to enable them to pay off their interest. This actually pushed the recognition
of these loans as non-performing to a later date but did not address the root causes of their unprofitability.

Intentional Frauds of high magnitude volume:

There happened many cases of frauds of high volume that have contributed to rising NPAs. Although the size
of frauds relative to the total volume of NPAs is comparatively small, but these frauds have been increasing,
and there have been no major instances of high-profile fraudsters being penalized.

Stalled Judiciary & Legislative Procedures:

The courts in India gave judgements that were not in favour / support of businesses. The judgements negatively
affected businesses, specifically the mining, power, and steel sectors. Furthermore, the businesses had to face
problems regarding the acquisition of land because of which many projects got stalled or delayed due to which
the repayments have not been done by many current NPA defaulters.

Poor Credit Appraisal System:

The lack of proper credit appraisal process is another factor for the rise in NPAs. Because of poor credit
appraisal, sometimes the bank grants loans to those who cannot pay back the loan.

Political Interference:
Political interfere in the working of public sector banks sometimes influenced lending decisions and loan
recovery processes, which had highly negative impact on asset quality.

Improper Risk Management:

Few banks lacked robust risk management systems, which made it difficult for them to identify and mitigate
potential risks associated with their loan portfolios.

Natural Calamities:
Natural calamities are also a factor creating an alarming increase in NPAs in public sector banks. India is hit by
one or the other major natural calamity very frequently that causes failure of repayment of loans by the
borrowers. Generally, the farmers are more dependent on rainfall for their crops. However, the irregularity in
rainfall decreases the production level of the farmer, and as a result, he is unable to repay the loan.
The combination of the above factors made it difficult for companies to repay the loans. Some of the other
factors that made the NPA crisis are:
1- Misgovernance and policy paralysis that affected the timeline, thereby increasing the project cost (for
example, in the infrastructure sector)
2- Slowdown in specific industry segments. Bans on mining projects, which greatly affected the industries
such as the iron and steel sector. Their operating cost became higher than their income. Thus, they were
unable to pay back their loans amount to the banks.
Question 4) What are the consequences of high NPAs on the Indian economy? –
excessive non-acting property (NPAs) will have a devastating effect at the Indian financial system.
here are some of the approaches that excessive NPAs can hurt the economic system:

* reduced credit score availability: when banks have lots of NPAs, they will be hesitant to lend cash
to new borrowers, even if the debtors have appropriate credit history. this is because banks may be
concerned that they'll no longer be able to get better their loans if the debtors default. this could
result in a slowdown in financial growth, as agencies and individuals might not be able to get the
credit score they need to make investments and develop.
as an instance, a small business proprietor won't be able to get a mortgage to extend their
business, which could lead to process losses.

* expanded risk of financial institution disasters: If banks are unable to get better their loans, they
may come to be insolvent and fail. this may have a ripple impact through the monetary system, as
other banks may additionally emerge as insolvent. this may result in a financial crisis, along with the
only that came about in 2008.

* loss of self assurance inside the banking system: when banks have a variety of NPAs, humans
might also lose confidence in the banking gadget. this will make it hard for banks to raise capital and
function efficiently.
as an instance, humans may be hesitant to deposit cash in banks, that may make it hard for banks
to lend cash. this will cause a slowdown in economic activity.

* reduced tax sales: Banks with a lot of NPAs may additionally should set apart extra provisions to
cowl potential losses. this could reduce their profits and the quantity of tax they pay to the
government. this will cause a lower in authorities sales, which could effect public offerings.
as an example, the authorities may also must cut funding for schooling or healthcare.

* increased authorities bailouts: The authorities can also ought to bail out banks which might be not
able to get better their loans. this will placed a pressure on the government's price range and result
in higher taxes. this could cause an boom inside the country wide debt.
for instance, the government might also should borrow money to bail out the banks, that may result
in higher hobby costs and inflation.

right here are some examples of the outcomes of excessive NPAs in India:

* In 2018, the Indian authorities needed to bail out the Punjab countrywide financial institution (PNB)
with $2.2 billion. The PNB was struggling with excessive NPAs, which were caused by a fraud
regarding the jeweler Nirav Modi.
* The high NPAs inside the Indian banking zone have also brought about a slowdown in lending. In
2019, the increase of financial institution credit to the personal zone changed into the slowest in six
years.
* The excessive NPAs have also had a terrible effect on the inventory marketplace. The BSE
Sensex, the benchmark stock index of the Bombay inventory exchange, has fallen via about 10%
due to the fact that the beginning of 2020.
The Indian authorities is taking steps to address the trouble of excessive NPAs. those measures
include:
* The Insolvency and bankruptcy Code (IBC), which became added in 2016, is designed to hurry up
the recovery of awful loans.
* The government has also installation a committee to study the NPAs of public region banks.
* The authorities is likewise offering monetary assistance to banks to assist them smooth up their
stability sheets.
it is too early to mention whether these measures can be a success in addressing the problem of
high NPAs. however, it's far clear that the Indian financial system can't afford to have a massive
variety of non-performing loans. The government and the banking zone want to paintings
collectively to find a method to this problem.

The outcomes of high NPAs can be a ways-achieving and may have a terrible impact at the Indian
economic system. it's far critical to take steps to deal with the hassle of excessive NPAs, such as
strengthening the regulatory oversight of banks and promoting loan restructuring.
Question 5) What are the policy actions taken to address the problem of growing NPAs in India? What changed
recently in the RBI’s guidelines to banks on NPAs? (Please try to compress in two pages and add source of
info in reference section)

Ans 5 ) The policy actions taken to address the problem of growing NPAs in India -

RBI
· The RBI undertook several measures to remedy the NPA, including the Prompt Corrective Action (PCA)
framework in 2002 (which was reviewed in 2017 based on the recommendations of the working group of
the Financial Stability and Development Council )
· Schemes for debt restructuring (like the Scheme for Sustainable Structuring of Stressed Assets (S4A))
· Asset Quality Review etc.
These efforts culminated in a 12 February 2018 circular by the RBI that granted banks the power to initiate
insolvency proceedings and set a timeline of 180 days to formulate plans for a resolution.
Government
· 4R’s Strategy: Government has implemented a comprehensive 4R’s strategy, consisting of Recognition
of NPAs transparently,
· Resolution and Recovery of value from stressed accounts
· Recapitalising of PSBs, and
Lok Adalats – 2001
· They are helpful in tackling and recovery of small loans however they are limited to 5 lakh rupees loans
only by the RBI guidelines issued in 2001. They are positive in the sense that they avoid more cases into
the legal system.

Compromise Settlement – 2001

· It provides a simple mechanism for recovery of NPA for the advances below Rs. 10 Crores. It covers
lawsuits with courts and DRTs (Debt Recovery Tribunals) however wilful default and fraud cases are
excluded.

SARFAESI Act – 2002

· The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act, 2002 – The Act permits Banks / Financial Institutions to recover their NPAs without
the involvement of the Court, through acquiring and disposing of the secured assets in NPA accounts with
an outstanding amount of Rs. 1 lakh and above.

Mission Indradhanush – 2015

· The Indradhanush framework for transforming the PSBs represents the most comprehensive reform effort
undertaken since banking nationalization in the year 1970 to revamp the Public Sector Banks (PSBs) and
improve their overall performance.

Insolvency and Bankruptcy code Act-2016

· It has been formulated to tackle the Chakravyuha Challenge (Economic Survey) of the exit problem in
India.
· The aim of this law is to promote entrepreneurship, availability of credit, and balance the interests of all
stakeholders by consolidating and amending the laws relating to reorganization and insolvency resolution
of corporate persons, partnership firms and individuals in a time-bound manner and for maximization of
value of assets of such persons and matters connected therewith or incidental thereto.

Bad Banks – 2017

A bad bank is a corporate structure that isolates illiquid and high-risk assets or non-performing loans held by a
bank or a financial organization. It is also referred to as Asset Management Company (AMC).
· The concept of a bad bank originated at the Pittsburgh headquartered Mellon Bank in 1988. The idea and
discussions over bad banks have been in place since 2015 when former RBI Governor Raghuram Rajan
started a debate on bad banks as a possible solution to the problem of NPAs.
· Afterwards, the former Interim Finance Minister put forth the idea of National ARC on a recommendation
of the Committee headed by Sunil Mehta. The Economic Survey 2017 also proposed to create a Public
Sector Asset Rehabilitation Agency (PARA).

National Asset Reconstruction Company Ltd:

· National Asset Reconstruction Company Ltd.(NARCL), India’s first-ever Bad Bank, was set up in 2021,
and RBI has recently granted the same under the SARFAESI Act 2002.
· If the bad bank is unable to sell the bad loan or has to sell it at a loss, then the government guarantee will
be invoked.
· To manage assets with the help of market professionals and turnaround experts, the Government will also
set up India Debt Resolution Company Ltd. (IDRCL) along with NARCL. The IDRCL is a service
company or an operational entity wherein public sector banks (PSBs) and PFIs will hold a maximum of
49% stake and the rest will be with private-sector lenders. When the assets are sold, with the help of
IDRCL, the commercial banks will be paid back the rest.

RBI’s guidelines to banks on NPAs -

Enforcing Strict Timelines

Lenders must strictly adhere to prescribed timelines when formulating and executing resolution plans. This
commitment ensures the implementation of a well-defined, time-constrained process to tackle non-performing
assets (NPAs) and mitigate their adverse effects on the banking sector.

Promoting Resolution Plan Incentives

Lenders are urged to offer incentives to borrowers to secure their agreement to ongoing resolution plans. This
fosters a conducive atmosphere for negotiations, thereby increasing the likelihood of successful NPA resolution
and recovery.

Enhancing Restructuring Frameworks

The Reserve Bank of India (RBI) underscores the necessity of enhancing the existing restructuring framework,
especially for higher-value loans. This involves the implementation of robust restructuring mechanisms and
effective monitoring of restructured accounts to prevent NPA recurrence.

Differential Pricing for Uncooperative Borrowers

Lenders have the authorization to levy higher interest rates on future loans for uncooperative borrowers during
the resolution process. This discourages defaulting and encourages borrowers to make timely payments and
engage in the resolution process.

Flexible Regulatory Treatment for Asset Sales

The RBI advocates a more flexible regulatory approach to selling distressed assets. This allows lenders to
expedite the resolution process by facilitating the sale of NPAs to asset reconstruction companies or other
purchasers.

Amortizing Sales Losses

In instances where a loss is incurred from asset sales, lenders are permitted to spread these losses over a
minimum period of two years. This provision aids banks in managing the financial impact of NPA sales more
effectively.

Streamlining Asset Acquisition

Specialized agencies are authorized to provide acquisition facilities for stressed companies. This promotes the
participation of specialized entities in the resolution process, facilitating the transfer of stressed assets to more
capable hands.

Encouraging Private Equity and Sector-Specific Companies

Efforts are made to encourage active involvement of private equity firms and sector-specific companies in the
distressed asset market. This brings specialized expertise and resources into play to address NPAs in specific
sectors.

These directives issued by the RBI aim to streamline the resolution process, incentivize prompt repayment, and
promote efficient asset management, ultimately addressing the issue of NPAs in the Indian banking system.
Question 6) What are the various solutions proposed by experts to address the problem of NPAs in India? Can
a ‘bad bank’ solve India’s growing NPA crisis?

Answer 6) While looking at the solution for NPAs, we also need to look at how NPAs generate a vicious cycle
of effects on the sustainability and growth of the banking system and, if not appropriately managed, could lead
to bank failures.
Indian banks together stood at gross non-performing assets (NPAs) of 5.8 % in March 2022, compared with the
ratio of 7.3 % in the previous year. The data reached an all-time high of 14.7 % in March 1999 and a record low
of 2.3 % in March 2011

(Please include committee formed in past and their recommendation like sashakt committee and any other
committee in past as asked solution proposed by experts)
To address the issue of non-performing assets (NPA), banks employ various methods, including debt recovery
tribunals, asset reconstruction companies, and Lok Adalats. In cases where borrowers cannot repay their loans,
banks have legal recourse to take action.
Some more extended solutions that can be taken are:
1. Utilizing data analysis and advanced frameworks to detect early warning signs,
2. Implementing mechanisms for identifying hidden NPAs,
3. Improving internal skills for efficient credit assessment and
4. Conducting forensic audits to understand borrower intent.

Below are different models that can help ensure efficiency while minimizing the burden on the government.
Private Asset Management Company (PMAC) – A suitable option may be for sectors experiencing high
stress levels. This is especially true when the assets have a short-term economic value and require moderate
debt forgiveness.
National Asset Management Company (NAMC) - It is necessary in sectors where excess capacity is not the
only issue. There may also be assets that are economically unviable in the short to medium terms.
This will support the government's expansionary policy and promote specialization in asset reconstruction. The
Insolvency and Bankruptcy Code offers companies a way to exit gracefully.

Bad Bank
The Concept of Bad Bank is not new and earlier there used to be ARC’s (Asset Restructuring Companies).
All ARCs registered with RBI are private companies, and as of January 2023, 29 Asset Reconstruction
Companies (ARCs) are listed with the Reserve Bank of India (RBI) in India. Hence, an Indian government
entity has also been registered with RBI to operate as an ARC for the first time - termed “Bad Bank.”
PNB Chairman Sunil Mehta Panel also proposed setting up a Bad Bank for speedy and efficient management
of Bad Loans.

The total gross non-performing assets (NPAs) of India's five major government banks is approximately Rs. 4.03
lakh crore. Unfortunately, the privately funded ARCs currently do not possess adequate funds to acquire these
banks' NPAs, hence a need for Bad Bank.

The Bad Bank is a good measure but only a partial solution. Bad bank comprises of 2 subunits - NARCL
(National Asset Reconstruction Company Limited) and IDRCL (India Debt Resolution Company
Limited).
NARCL's main responsibility is to contact commercial banks, particularly government banks, and negotiate the
transfer of non-performing assets (NPAs).
Once the NPAs are transferred to the Bad Bank's books, IDRCL takes over. Its main responsibility is to oversee
the resolution process. The first step is to contact the borrower to discuss potential repayment options. IDRCL
will develop a debt resolution plan if required by selling off the assets associated with the loan. They will also
organize and manage auctions to sell the debt-related assets for cash.

Conclusion if Bad Bank can be a solution:

Bad Banks are just firefighters as they don't stop banks from generating more NPAs. Currently, most NPAs
result from bank oversight and corruption, so banks must be accountable. Although they help take over the NPA
and look good in the present scenario - this may also make banks more complacent in issuing loans.
Question 7) Field visit: Meet top officials of a commercial bank (public or private) and discuss the issue of
growing NPA in depth. Understand the causes and consequences of rising NPAs, the challenges involved in
resolving the problem, and possible solutions to the problem from the official. Include the findings of this
exercise in your project report. -

Answer : Response based on Field visit: Meeting and discussion with Pratip Mukherjee (Territory Head –
Emerging Enterprises Group Goa) and Mangal Kumar (Manager - Corporate Lending) of HDFC Bank , Goa.

A) Causes of rising NPAs in India:

i) Lack of Due Diligence: Few of the banks are not undertaking proper due diligence while extending loans to
the businesses and individuals.
ii) Independent Credit approval powers : In case of few banks the credit approval power up-to a certain amount
lies with branch managers, who exercise their own judgement to grant loan.
iii) Unsecured Loans : Many banks mainly NBFC & Cooperative banks lend without proper securitisation.
iv) Wilful Default : In many cases mostly where loans granted under government schemes, the borrowers take
loans irrespective of their paying capacity and wilfully default in anticipation of waiver from government.
v) Business losses : In many cases business suffer severe losses due to change in regulatory and business
environment which leads to high cost of production, reduction in sales and capacity underutilisation.

B) Consequences of rising NPAs:

i) Financial Impact to Banks: It affects profitability and growth of the affected Bank.
ii) Loss of Reputation : It affects reputation of bank adversely among key stakeholders i.e. RBI, Investors and
shareholders.
iii) Tightening of Lending norms : Bank with high NPAs generally tighten the lending norms affecting their
credit growth.
iv) Capital Inadequacy : High NPA affects liquidity position and capital inadequacy.
v) Impact on Economy : High NPA level in banking sectors leads to reduction in credit growth which in turn
hampers the economic growth.

C) Challenges involved in resolving the problem:

i) Long Process for recovery : The legal process for recovery & settlement is time consuming specially in the
case of unsecured funding and bankruptcy,
ii) Lack of robust process to identify Asset Quality : Many banks don’t have robust system to identify assets
quality to initiate efforts for recovery and to make necessary provisioning in the books.
iii) Low participation of Asset Reconstruction Companies (ARC) : The participation is low due to regulatory
and legal framework in India.
iv) Political waivers : The political induced waivers induce wilful default.

D) Possible Solutions:
i) Strengthening of Due Diligence Process : HDFC has framework of due diligence involving various agencies
for financial, legal and technical appraisal to decide credit worthiness of customer.
ii) Securitised Funding : HDFC bank mainly grant secured / asset backed loans and don’t consider agri land as
security as same is not tenable for recovery as per SARFAESI Act.
iii) Legal and Regulatory support for fast resolution and recovery : Legal and regulatory reforms required to
expedite the process of settlement and recovery.
iv) Robust governance and risk management framework in banking system : HDFC has defined delegation of
approval and deviation approval system for deciding granting of loan. Any deviation in lending norms is
reviewed by the Risk Manager.
v) Robust system to review asset quality and on time provisioning of NPAs : HDFC has system to identify NPA
based on ageing of default for eg overdue loan recovery more than 60 days is classified as substandard, above
90 days as doubtful assets and more than 12 month as loss asset for necessary provisioning in the books and to
initiate necessary actions for the recovery.
vi) Educating borrowers : Educating borrowers on importance of repayment and consequences of default i.e.
mainly in case of lending under government schemes
vii) Corporate Debt restructuring : by adjusting repayment time and interest rates to support repayment.
viii) One time Recapitalisation of losses and infusion of funds by Government : specially in PSUs to induce
liquidity required for economic growth followed by strengthening of norms.
ix)Asset Reconstruction Companies (ARC) : Legal and regulatory support to ARCs in order to increase their
role in resolving and recovering NPAs through asset reconstruction or through asset liquidation.

Concluding Remarks
Mr Pratip Mukherjee (Territory Head – Emerging Enterprises Group Goa) mentioned that 70% of NPA is
contributed by Public sector banks and around 30% by Private sector banks i.e. mainly by promoter driven
NBFC.
He also mentioned that banks like HDFC give emphasis on securitised loans, involvement of multi disciplined
team for loan approval and also do proper due diligence taking into cognizance of financial and non-financial
parameters.
He also explained the robust process followed by HDFC to monitor assets quality through Personal Monitoring
Group who assigns account as Special Mentioned Account (SMA) immediately on default by any borrower,
who then hand it over to collection group for resolution through mutual settlement or recovery by legal process.
The internal target taken by HDFC for NPA is 1.5% and their actual NPAs are below the target.

Question 8) Summary, policy conclusions, and group’s response to the question: Can India resolve the
problem of growing NPAs without affecting economic growth?

References
Questio References
n

2 https://economictimes.indiatimes.com/news/economy/indicators/banks-gross-npa-fell-to-a-10-
year-low-of-3-9-in-march-rbi-in-financial-stability-report/articleshow/101337543.cms

https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=1237

https://www.zeebiz.com/india/news-top-five-sectors-with-most-exposure-to-banks-npas-what-
can-be-done-17462

CEIC: https://www.ceicdata.com/en/indicator/india/non-performing-loans-ratio.
3
PRS India : Home | PRSIndia

References : ‘Indian Economy’ by Ramesh Singh https://unacademy.com/content/upsc/study-

4 material/banking-and-finance/new-npa-norms-of-rbi/
https://timesofindia.indiatimes.com/blogs/economic-update/npas-and-its-effects-on-banks-
profitability/
https://www.clearias.com/non-performing-assets-npa/