Question

Recently we have seen a decrease in the level of NPAs. What are the various steps taken by the Government and Central Bank to address the issue which led to the decrease in NPAs?

Answer 1

Approach:

• Define what is NPA and mention one or two fact related to the first statement of the question if you know.
• Highlight the various steps taken by the Government and Central Bank during previous few years and in present.
• In conclusion, try to give the way forward.

Non-performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days or more. In case of Agriculture/Farm Loans, the NPA varies for short duration crop (interest not paid for 2 crop seasons) and long duration crops (interest not paid for 1 Crop season).

According to Economic survey 2018-19, the performance of the banking sector (domestic operations), and Public Sector Banks in particular, improved in 2018-19.

The Gross NonPerforming Advances (GNPA) ratio of Scheduled Commercial Banks (SCBs) decreased from 11.5 % to 10.1 % between March 2018 and December 2018 while for PSBs it declined from 15.5 % to 13.9 %.
Steps Taken By The Government And Central Bank

The measures taken to resolve and prevent NPAs can broadly be classified into two kinds – first, regulatory means of resolving NPAs per various laws (like the Insolvency and Bankruptcy Code), and second, remedial measures for banks prescribed and regulated by the RBI for internal restructuring of stressed assets. To resolve the problem of NPAs Government followed the strategy of 4Rs (as mentioned in 2016 economic survey):

1. The first R, Recognition: through Asset Quality Reviews and Joint Lenders’ Forum banks have recognised a growing number of loans as non-performing.
Banks are now required to acquire Legal Entity Identifier (LEI) number from the borrower and report it to Central Repository of Information on Large Credit.

2. The second R, Reform: Reforms in banks and financial ecosystem to ensure a responsible and clean system. Various steps were taken to reform banks like:

• Mission Indradhanush, 2015: It provided for Comprehensive framework for transforming the PSBs. Under the PSB Reforms Agenda, PSBs have created Stressed Asset Management Verticals to focus attention on recovery and entrusted monitoring of loan accounts of above Rs. 250 crore to specialised monitoring agencies.
• Fugitive Economic Offenders Act, 2018: It has been enacted to deter economic offenders from evading the process of Indian law by remaining outside the jurisdiction of Indian courts.
• Prompt Corrective Action (PCA): is a framework under which banks with weak financial metrics are put under watch by the RBI. The PCA framework deems banks as risky if they slip below certain norms on three parameters — capital ratios, asset quality and profitability.
• The consolidation of Banks is also seen as a way out of the NPA issue through the “strong” banks absorbing the strain on the books of weaker banks. Eg: Merger of Dena and Vijay Bank with Bank of Baroda.

3. The third R, recapitalised: Government of India announced recapitalization of PSBs to the tune of Rs. 2.11 lakh crore in October 2017, through infusion of capital by the Government and raising of capital by banks from the markets

4. The fourth R, Resolution: The Insolvency and Bankruptcy Code (IBC) was enacted in May 2016 to provide a time-bound 180-day recovery process for insolvent accounts (where the borrowers are unable to pay their dues).

In line with the enactment of the IBC, the RBI, substituted all the specific pre-existing guidelines with a simplified, generic, time-bound framework for the resolution of stressed assets.In the revised framework, the RBI put in place a strict deadline of 180 days during which a resolution plan must be implemented, failing which stressed assets must be referred to the NCLT under IBC within 15 days. The framework also introduced a provision for monitoring of one-day defaults, where incipient stress is identified and flagged immediately when repayments are overdue by a day.

(Also recently, The Supreme Court quashed the stringent RBI circular which mandated banks to recognise even one-day defaults and finding a resolution within 180 days failing which the account in question has to be sent to bankruptcy courts if it is Rs 2,000 crore and above.)
The RBI guidelines from time to time have laid a firm pathway for improving overall robustness to manage NPAs. Banks would need to adopt and implement the measures in true spirit and substance and not just in “form” to further improve the situation otherwise the problem will keep on coming back.