Blog: Target30+ in General awareness: Non Performing Assets – Bankersadda

Target 30+ is series of static awareness in context of current affairs. This will support your preparation  along with the power capsule provided by our team. In this article we are discussing about Non Performing Assets.

What Is An NPA?

  • Non-Performing Assets (NPA) are loans and arrears lent by the banks or financial institutions whose principal and interests are delayed beyond 90 days. In simpler terms, any asset that ceases to provide returns to its investors for an extended period of time is referred to as a non-performing asset (NPA).  Commercial loans that are more than 90 days past due and consumer loans that are more than 180 days past due are typically classified as nonperforming assets by banks.
  • In the case of agricultural loans, NPAs are declared if the interest and/or instalment or principal remain unpaid for two harvest seasons.
    • However, this period should not be longer than two years. Any unpaid loan/instalment will be classified as NPA after two years.

  Classification of NPAs:

  • Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
    • SMA-0 is a category in which both the principal and interest has remained outstanding for a period of 30 days after the payment due date and there can be some incipient stress with the loan account.
    • SMA-1 is a category in which stress with respect to the principal and interest has remain overdue for a period of more than 30 days to 60 days.
    • SMA-2 is the third category devised in order to mitigate the bad loan problem with the amount being overdue for tenure between 61 days to less than 90 days
  • Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
  • Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”

NPA Problem In India:

  • The NPA was on a declining trend from FY 2018 due to various initiatives by the Reserve Bank of India and the central government such as the Insolvency and Bankruptcy Code, Abolition of previous initiatives like 5:25 rule etc.
  • Due to the effects of the coronavirus (COVID-19) epidemic and lockdown, the country was expected to see an increase in bad loans.
  • The Reserve Bank of India projected three scenarios for the fiscal year 2022 until September 2021 based on the value for September 2020.
  • Under the baseline scenario, the Gross NPA-ratio would reach 13.5 percent, setting a new high.
  • The total size of the banking sector’s NPAs is estimated at over Rs 6.7 lakh crore, of which no less than Rs 6 lakh crore is accounted for by state-owned banks or public sector banks (PSB).
  • Approximately 16% of loans and advances of banks are stressed assets (NPA + restructured accounts + write offs).
  • This is higher than BRICS partners except for Russia.
  • This is alarming given that capital adequacy ratio(CAR) threshold for banks are prescribed at 12%.
  • Stressed assets for public sector banks are 17% while for private banks, it is 7% and for foreign lenders it is 6%.
  • The asset quality of PSU banks is the worst amongst the lot.
  • In the boom years, Indian companies took on significant loans to ramp up capacities.
  • But while debt galloped, underlying assets did not grow at the same pace.

 The New Ordinance To Tackle The NPAs:

  • An ordinance to amend the Banking Regulation Act of 1949 has been issued.
  • The Presidential Ordinance empowers the Reserve Bank of India (RBI) to enforce expeditious resolution of NPAs of banks.
  • The Union government has now empowered itself to direct the RBI to take necessary steps to initiate the NPA resolution process once a default has been established.
  • The earlier provisions of the Banking Regulation Act did not allow the government to direct the RBI to enforce NPA resolution for cases of default.
  • On one hand this new provision is an intrusion into central banks sole authority, but on other hand projects the role of the political establishment as a proactive agent in bank NPA resolution.
  • NPA resolution under the amended law can take place on specific directives of the Union government.
  • The ordinance also links the Bankruptcy code to the Banking regulation act.
  • The Ordinance also allows the RBI to set up oversight committees for banks with NPAs that remain a matter of concern requiring early resolution.
  • This will certainly empower the central bank to enforce a closer supervision of banks with sticky loans.

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