Team Adda247 and Bankers Adda have introduced a Special Banking Awareness series for SBI and IBPS Interviews 2021. In this series, we will be introducing the candidates with some banking awareness topics Daily that will improve their general awareness and will also ensure that the candidates do not lack in any banking term when it comes to the interview round. Today the topic of our Banking Awareness Series is Non Performing Assets in India.
Non Performing Assets in India
Definition: Money or Assets are provided by banks to individuals or companies in terms of loan and this loan would be unpaid by borrower is called as ‘Non Performing Asset’. This late payment or unpaid loan by borrower is defined as NPA and it is also termed as ‘bad assets’.
RBI monitors and controls the entire banking system in India and according to RBI’s guidelines, if the interest or instalment amount is overdue for a period of more than 90 days then that particular loan account will be considered as Non-Performing Asset.
Reason behind rising level of NPAs:
The Indian economy was in boom phase from 2000-2008 and banks specifically Public Sector Banks had given loans extensively to companies. With the financial crisis 2008-09, companies made less profits and the government of India banned mining projects. Because of this situation results shortage of supply of raw materials and it affected infrastructure sector, power, iron and steel sector as well.
Another reason is, the lending norms adopted by banks were relaxed for big corporate houses, foregoing analysis of their financials and credit ratings.
Expectation of RBI on NPAs: According to the Reserve Bank of India’s bi annual financial stability report which was published in January, 2021 Non-Performing Assets may rise to 14.8% in one year in case of severe stress scenario, which was 7.5% in September, 2020.
Some steps and developments taken to handle NPAs:
Insolvency and Bankruptcy code (IBC): Constituted by parliament in 2016, to consolidate the existing framework by creating a single laws for insolvency and bankruptcy. The resolution process is now quickly done from earlier to control the quality of assets.
Credit Risk Management: CRM taking the accountability of monitoring, credit appraisal and credit by performing various analyses on profit and loss accounts. At the time of conducting these analyses, banks are nowadays also considering a sensitive analysis and build their safeguards against external factors.
Strict Credit Monitoring: A proper and effective Management information System (MIS) is implemented to monitor warnings and take preventive steps before it occurs. MIS can detect issues and alerts to management in timely manner so that necessary steps can be taken to control it.
Amendments to give more power to RBI: The current scenario is allowing the RBI just to inspect a lender but it does not give them the power to set up an oversight committee. With the amendment to the law, RBI will be able to monitor large accounts and create oversight committees.
Strictness in NPA recovery: Government should give more power to banks to recover their NPAs amount rather than to wait and watch position.