Why in News?

India's banking system has been grappling with an alarming surge in non-performing assets (NPAs). RTI enquiry, by a leading newspaper, revealed that a staggering 43% of total NPAs as of March 2019 - amounting to ₹4.02 lakh crore - was owed by just 100 companies.

This highlights systemic issues and the concentration of bad loans among a few prominent borrowers.

What’s in Today’s Article?

• What are Non-Performing Assets (NPAs)?
• Key Highlights of the NPA Crisis in India
• Impact on the Banking Sector
• Conclusion

What are Non-Performing Assets (NPAs)?

• Definition: A NPA is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
  • For banks, a loan is an asset because the interest paid on these loans is one of the most significant sources of income for the bank.
  • When customers, retail or corporates, are not able to pay the interest, the asset becomes ‘non-performing’ for the bank because it is not earning anything for the bank.
  • Therefore, the RBI has defined NPAs as assets that stop generating income for banks.
  • Banks are required to make their NPAs numbers public and to the RBI as well from time to time.
• Classification of assets: As per the RBI guideline, banks are required to classify NPAs further into -
  • Substandard assets: Assets which have remained NPA for a period less than or equal to 12 months.
  • Doubtful assets: An asset that has remained in the substandard category for a period of 12 months.
  • Loss assets: It is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some recovery value.
• NPA Provisioning: Provision for a loan refers to a certain percentage of loan amount set aside by the banks.
  • The standard rate of provisioning for loans in Indian banks varies from 5-20% depending on the business sector and the repayment capacity of the borrower.
  • In the cases of NPA, 100% provisioning is required in accordance with the Basel-III norms.
• GNPA and NNPA: There are primarily two metrics that help us to understand the NPA situation of any bank.
  • GNPA: It is an absolute amount that talks about the total value of gross NPAs for the bank in a particular quarter or financial year as the case may be.
  • NNPA: Net NPAs subtracts the provisions made by the bank from the gross NPA. Therefore, net NPA gives the exact value of NPAs after the bank has made specific provisions for it.
• NPA Ratios: NPAs can also be expressed as a percentage of total advances. It gives us an idea of how much of the total advances is not recoverable. For example,
  • GNPA ratio is the ratio of the total GNPA of the total advances.
  • NNPA ratio uses net NPA to find out the ratio to the total advances.

Key Highlights of the NPA Crisis in India:

• Timeline of NPAs:
  • Peak in 2018: NPAs reached a historic high of ₹10.36 lakh crore.
  • Decline: NPAs reduced to ₹5.71 lakh crore by March 2023, aided by write-offs by banks.
  • RTI revelation: The list of top defaulters was accessed under the Right to Information Act after a four-year legal battle, highlighting reluctance from RBI to disclose such information.
• Extent of NPAs:
  • Gross NPAs: Scheduled commercial banks (SCBs) recorded gross NPAs of ₹9.33 lakh crore as of March 31, 2019, the 2nd-highest in Indian banking history.
  • Top defaulters: The top 100 defaulters alone accounted for ₹8.44 lakh crore in total debt, of which nearly 50% was declared as NPAs.
  • Sectoral analysis: Three sectors - manufacturing, energy, and construction - dominated, contributing over 50% (₹4.58 lakh crore) of the total debt of the top 100 defaulters.
• Sector-wise breakdown of defaulters:
  • Energy sector: 34 companies
  • Manufacturing sector: 32 companies
  • Construction and real estate: 20 companies
  • Telecom: 5 companies
  • Other sectors: 9 companies
• Quantum of debt (Top defaulters):
  • Bhushan Power & Steel Limited: ₹41,400 crore.
  • Essar Steel India Limited: ₹69,360 crore (later acquired by ArcelorMittal Nippon Steel India Limited in 2019).
  • Other major defaulters: Reliance Communications (₹46,659 crore), Videocon Industries (₹58,052 crore), and Jaiprakash Associates (₹36,591 crore).

Impact on the Banking Sector:

• Ongoing debt concerns (2023):
  • Outstanding debt: By March 2023, 51 of these 100 companies still carried debts of ₹3.58 lakh crore, indicating persistent financial stress.
  • These defaulters span crucial sectors: Like oil & gas, thermal and hydro power, mining, shipbuilding, and infrastructure development.
• Limited recoveries:
  • 82 of the top 100 entities are under bankruptcy, with one-third undergoing liquidation, significantly reducing recovery prospects.
  • High-profile companies like Jet Airways, Gitanjali Gems, and IL&FS subsidiaries feature prominently in the defaulter list, indicating minimal returns for lenders.
• Curb investment:
  • Banks lack enough funds to lend for other productive activities in the economy.
  • To maintain their profits, banks may need to raise interest rates.
  • Reduced investments could lead to higher unemployment rates.

Conclusion:

• The concentration of bad loans among a few corporate giants raises concerns about governance and accountability in India’s banking system.
• While recovery efforts are ongoing, the NPA crisis underscores the need for stronger regulatory oversight and improved lending practices to prevent similar episodes in the future.