Nonperforming Asset refers to a credit or advance that is in default on recurring payments of principal and interest subject to a certain time frame. Generally this time frame is 90 days i.e. if the loan payments remain unaccounted for a period of 90 days then the debt is classified as a non performing asset. In other words an asset that ceases to generate any income for the lender is tagged as a non performing asset.

“The answer to NPA problem is unambiguously clean up!”

- Dr. Raghuram G. Rajan, Former Governor, RBI at ASSOCHAM- Interactive meet with industry and trade, Bengaluru

In India the supreme regulatory authority of the banking system is the Reserve Bank of India and it defines nonperforming asset as a loan account on which principal or installment amount is belated for a period of more than 90 days. In recent times there has been a monumental rise in the level of nonperforming assets in the Indian banking sector and the inadequate progress in the financial health of the companies is attributed as the fundamental reason for this.

A NON PERFORMING SECTOR- INDIAN BANKING SECTOR

As on 31 March 2018, Indian banks’ gross nonperforming assets stood at ₹ 10.25 lakh crores. In the last quarter of financial year 2017-18 the gross value of NPAs rose by ₹ 1.39 lakh crores or 16 percent from ₹ 8.86 lakh crores as on 31 December 2017. This value of gross NPAs now accounts for 11.8 percent of the total loans advanced by the banking sector. A classified analysis of the NPAs in Indian banking sector shows that 21 public sector banks saw their bad loans pile expanded by ₹ 1.19 lakh crores to ₹ 8.97 lakh crores in March 2018, while that of the 18 private banks surged by ₹19,446 crores to ₹ 1.28 lakh crores in March 2018.

The State Bank of India (SBI) in on top of the NPA chart and has lodged an increase of 24,286 crores in its gross NPAs to ₹ 2.23 lakh crores. The Punjab National Bank recently hit by the Nirav Modi led scam has noted the maximum rise in bad loans amounting to ₹ 29,100 crores to reach ₹ 86,620 crores in the March quarter. Only Bank of India (BoI)and Oriental Bank of Commerce (OBC)reported a decline in the levels of bad loans by ₹ 1,920 crores and ₹ 1,417 crores respectively.

Coming to the private sector banks, the bad loans of ICICI bank and Axis Bank have risen significantly. ICICI Bank's bad loans pile grew by ₹ 8,024 crores in the March 2018 quarter to ₹ 54,063 crores whereas Axis Bank's widened by ₹ 9,248 crores to ₹ 34,249 crores in the March 2018 quarter.

Public Sector Banks with highest gross NPAs (in crores)

WHY ARE NPAs PILING UP IN THE INDIAN BANKING SECTOR?

Like anything else NPAs too have reasons behind their occurrence. Various trends in the global as well as domestic economy have been credited for motivating huge amount of bad loans or NPAs in the banking sector.

  • Economic slowdown– In between the early 2000s and 2008, there was a economic boom in the Indian economy. This led to high profitability for the corporate sector. Thus favourable financial statements of the corporate prompted the banks especially public sector banks to lend extensively. But during the latter part of 2008, a recession began in the economy which dwindled the capacity of the borrowers to repay their loans. This increased the default rate and led to a mountain of NPAs.  
  • Relaxed lending norms – Another reason for rising NPAs is the relaxed lending norms of the banks for the corporate sector as often financial status and credit rating of the corporate is not analyzed properly.
  • Excessive competition – Due the excessive competition, banks are hugely selling unsecured loans that are significantly contributing to the attribution of NPAs in the banking sector.
  • Wrong credit distribution – Public sector banks provide about 80 percent of their credit to industries which forms a huge chunk of Nonperforming assets.

These are few important factors that have triggered the volume of Nonperforming assets in the Indian banking circuit. Here is a graph representing increase in the gross NPAs over the years.

Gross NPAs (in crores)

STEPS BY WHICH THE GOVERNMENT TO CURB NPAs

The government has always been on its toes when it comes to tackle the menace of mounting bad loans that is denting the profits of the banks and also hurting the economy by slowing the fund flow to the industries.

The following are a few steps the government and Reserve Bank of India can take to increase the velocity of recovery of Nonperforming assets:

  • Amendment in banking law to give additional powers to RBIThe Banking Regulation Act has to be amended as soon as possible to give powers to RBI to monitor the accounts of big defaulters. Also there must be alteration to the laws as to extend some restriction on the banks to advance credit to the defaulting company that has failed to repay to other banks.
  • Recovery rules must be stringentThe Securitisation and Reconstruction of Financial Assets Act or Sarfaesi Act of 2002 was amended as often took banks years to recover the stressed assets. Also it has been pointed that NPA problem has to be tackled well before the commencement of default and this would require pre assessment by the lender and gather early signs of any future default.
  • A ‘hair cut’ for the banks – Considering the gravity of the problem the government must ask banks for a ‘hair cut’ or write offs for NPAs. The ministry of finance and RBI are also considering setting up of a ‘Bad Bank’ just to deal with the problem of Nonperforming assets.  
grey, yellow, and red train on forest during daytime
Photo by Melanie Hughes / Unsplash

MAJOR CONTRIBUTORS TO THE GREAT PROBLEM

As per the reports of the RBI just 12 companies account for nearly 25 percent of the total NPAs in the Indian banking sector. These companies have been put on the top of the list for immediate insolvency proceedings.

  • Bhushan Steel Ltd. – Bhushan Steel Ltd. is the largest manufacturer of auto grade steel in India and it has a loan default of ₹ 44,478 crores. The State Bank of India leads the consortium of its lenders.
  • Lanco Infratech Ltd. – Once listed in the fastest growing companies in the world has a loan default of ₹ 44,364 crores. The prime lender of Lanco Infratech Ltd. is IDBI Bank.
  • Essar Steel Ltd. – Essar Ltd. one of the biggest in India and abroad has a loan default of ₹ 37,284 crores.
  • Bhushan Power and Steel Ltd. – Bhushan Power and Steel Ltd. is a sister company of Bhushan Steel has a loan default of ₹ 22,075 crores and was dragged to the National Company Law Tribunal by the Punjab National Bank.
  • Alok Industries – Alok Industries which is a Mumbai based textile company has a loan default of ₹ 22,075 crores. The prime lender in this case is the State Bank of India.
  • Amtek Auto Ltd. – Amtek auto has a loan default of ₹ 14,074 crores. It is SBI that has moved to the NCLT for its bankruptcy proceedings.
  • Monnet Ispat and Energy Ltd – Monnet Ispat and Energy, one of India’s steel producers have a loan default of ₹ 12,115 crores.
  • Electrosteel Steels Ltd – Electrosteel Steels is an Indian water infrastructure company based in Khardah near Kolkata. The default amount of the company is ₹ 10,273 crores. The leader of the consortium is again SBI.
  • Era Infra Engineering Ltd. – Era Infra Engineering Ltd has a loan default of ₹ 10,065 crores. It is the Union Bank that has moved against the company and appealed to the NCLT.
  • Jaypee Infratech Ltd. – It is a subsidiary of Jaypee Group and has a loan default of 9,635 crores. The petitioner in this case is IDBI bank.
  • ABG Shipyard Ltd.– It is an Ahmedabad based shipbuilding company having a loan default of ₹ 6,953 crores. It is one of the few companies that has agreed to the loan defaults made by it.
  • Jyoti Structures Ltd. – It has a loan default of ₹ 5,165 crores. It was the first among the 12 companies to face the bankruptcy proceedings. The lead lender is SBI.

CONCLUSION

Nonperforming assets are a real menace and has to be countered for any economy to grow. It is something that restricts flow of funds in an economy which itself means economic backdrop. More than anyone else it is the banks of the country that are required to be vigilant while performing their lending activities and be double sure about the financial health of the corporate entity they are lending to. Also the banking sector must focus on quality rather than quantity i.e. in spite of lending to corporate with dwindling financial position it should lend to a comparatively stable business entity. We also talked about the top NPA defaulters in India but mind you that this is not the complete list. This is just a quarter of the complete defaulters. The government without wasting any time has to take some strong decisions to solve the issue of stressed and nonperforming assets as this is a cancer for our country’s economic and social development.