When a person delays the payment of the loan or an amount which was due on him through the delay in payment in either interests or installments or principal amount, that particular loan or amount is termed as Non-Performing Asset. The topic is important for the IAS Exam as it is keeping in the news after former RBI Governor Raghuram Rajan on 14th July 2020 made a statement about the unprecedented increase in the NPAs due to the Covid-19 crisis.
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What is the difference between Bank fraud and Non-Performing Assets (NPA’s)?
Non Performing Assets is not a new problem faced by banks. Hence there have been continuous efforts on the part of Government of India and Reserve Bank of India (RBI), over the years to tackle the problem of Non Performing Assets. There is a difference between bank fraud and NPA:
Bank fraud is a criminal offence, Non-Performing Assets is a loan or advance wherein interest or installments of principal remain overdue for a period of 90 days.
As per Reserve Bank of India (RBI), an asset becomes non-performing when it stops to generate income for the bank. The Non Performing Assets in Public Banks are valued at approximately $ 62 Billion, which represents 90% of total NPA in India.
What were the reasons behind the rise of Non Performing Assets in India?
- In the period from 2004 to 2009, there was a huge growth in the economy, which led to firms taking bank loans very aggressively.
- Most of the investment was in infrastructure sectors like roads, power, aviation, steel
- Laxity in lending norms by the banks, without analysing the financial health of the companies and their credit ratings
- The banning of mining projects, delay in environment permit, led to a rise in prices of raw materials and a big gap in demand and supply thereby affecting power, steel and iron industries. This affected the capacity of the companies to repay the loans to banks which resulted in Non-Performing Assets (NPA).
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NPA (Non-Performing Assets) – 3 Classifications
Based on different parameters the Non Performing Assets are classified into different types.
Below table gives the different classification of Non Performing Assets:
|Classification of Non-Performing Assets (NPA)||Criteria|
|Substandard Assets||These are the assets which have remained NPA for a period of less than or equal to 12 months|
|Doubtful Assets||If the asset is in the substandard category for a period of 12 months|
|Loss Assets||These assets are of little value, it can no longer continue as a bankable asset, there could be some recovery value.|
What are the impacts of Non-Performing Assets (NPA)
- Banks won’t have sufficient funds for other development projects which will impact the economy
- To maintain a profit margin, banks will be forced to increase interest rates.
- Due to curb in further investments, it may lead to the rise of unemployment.
Measures to control Non-Performing Assets (NPA) – Government of India and RBI
As the Non-Performing Assets is not a new phenomenon, there have been many efforts on the part of the Government of India and RBI to sort out the problem.
Below table gives the list of measures taken to control Non-Performing Assets (NPA)
|Debt Recovery Tribunal (DRT) – 2013||
|Credit Information Bureau (2000)||
|ARC (Asset Reconstruction Companies)||
|Corporate Debt Restructuring (2005)||
|5:25 Rule (2014)||
|Joint Lenders Forum (2014)||
|Mission Indradhanush (2015)||
|Strategic Debt Restructuring (SDR) – 2015||
|Asset Quality Review (2015)||
|Insolvency and Bankruptcy Code (2016)||
Aspirants reading the topic, ‘Non-Performing Assets (NPAs) can also read other Economics related articles linked in the table below:
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