Gross NPAs of Banks

In News

• A report by Crisil Ratings stated that gross non-performing assets (NPAs) of banks are expected to rise to 8-9% this fiscal from 7.5% as on March 31.

Key Findings

• NPA of Banks:
  • Gross non-performing assets (NPAs) of banks are expected to increase to 8-9 per cent in the current financial year.
  • But gross NPAs of banks would still remain below the peak of 11.2% seen at the end of fiscal 2018.
• Retail and MSME: 
  • The retail and MSME segments, which together form 40% of bank credit, are expected to see higher accretion of NPAs and stressed assets this time around.
  • Operationalisation of the National Asset Reconstruction Company Ltd (NARCL) by the end of this fiscal and the expected first-round sale of ?90,000 crores NPAs could lead to lower reported gross NPAs.
• COVID-19 relief measures:
  • Such as the restructuring dispensation and the Emergency Credit Line Guarantee Scheme (ECLGS) would help limit the rise.
• Bank credit: 
  • With 2% of bank credit expected under restructuring by the end of this fiscal, stressed assets — comprising gross NPAs and loan book under restructuring — should touch 10-11%
• Rural Segment:
  • The rural segment, which was hit harder during the second wave of the pandemic, has also seen a strong recovery. 
  • Therefore, stressed assets in the agriculture segment are expected to remain relatively stable, the rating agency pointed out.
• Base-case scenario:
  • The estimates were predicated on a base-case scenario of 9.5% GDP growth this fiscal and continued improvement in corporate credit quality.
  • A virulent third wave and significant deceleration in demand growth could pose significant downside risks to these estimates, it added.

Non-Performing Asset (NPA)

• NPAs are loans or advances made by a financial institution, on which both principal or interest is unpaid for a specified period of time. 
• Thus, NPAs are those loans that have ceased to generate income for the bank.

Types of NPA

• Sub Standard:  A sub-standard asset is one that is classified as an NPA for a period not exceeding twelve months.
• Doubtful: A doubtful asset is one that has remained as an NPA for a period exceeding twelve months.
• Loss: A loss asset is one where loss has already been identified by the bank or an external institution, but it is not yet completely written off, due to its recovery value, however little it may be.

Issues with NPA

• Needs Provisioning: The bad loans lead to banks’ having to save a part of their operating revenue to account for bad loans. This is called Provisioning. The technical term used for provisioning is Capital Adequacy Ratio (CAR) or Capital to Risk (weighted) Assets Ratio (CRAR).
• Loss of Profit: The banks are required to provision for bad loans out of their operating income. The concerned bank becomes less profitable because it has to use some of its profits from other loans to make up for the loss on the bad loans. 
• Becomes Risk-averse: The officials of such banks hesitate from extending loans to business ventures that may remotely appear risky for the fear of aggravating an already high level of non-performing assets (or NPAs).
• Affects Valuation: Any reduction in the perceived valuation of the banks might lead to loss of share value of the banks, leading to general downfall in the share markets. This could result in wiping out shareholders’ wealth from the financial markets.
• Rising Bad Loans: In spite of various efforts, a substantial amount of NPAs continue on the balance sheets of banks primarily because the stock of bad loans as revealed by the Asset Quality Review is not only large but fragmented across various lenders.

(Image Courtesy: BS )

Various Steps Taken for NPA 

• Insolvency and Bankruptcy Code (IBC);
• Strengthening of Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI Act) and Debt Recovery Tribunals;
• Setting up of dedicated Stressed Asset Management Verticals (SAMVs) in banks for large-value NPA accounts etc.
• Existing ARCs have been helpful in the resolution of stressed assets, especially for smaller value loans. 
• However, considering the large stock of legacy NPAs, additional options/alternatives are needed.

Source: TH