Non-Performing Assets (NPA) are loans and arrears lent by the banks or financial institutions whose

principal and interests are delayed beyond 90 days. The Classification of NPA is based on the number of
days the payment of principal and interest is due. It is classified as Substandard assets, Doubtful assets,
and Loss assets.

What are Non Performing Assets?

 When an asset no longer generates income for the bank, it is considered a non-performing
asset.
 Previously, an asset was classified as a non-performing asset (NPA) based on the concept
of "Past Due."
 A 'non-performing asset' (NPA) was defined as a credit for which interest and/or
principal installments have been 'past due' for a specified period of time.
 To move towards international best practices and ensure greater transparency, '90 days'
overdue norms for identifying NPAs were made applicable beginning with the fiscal year
ended March 31, 2004.
 Commercial loans that are more than 90 days past due and consumer loans that are more
than 180 days past due are typically classified as nonperforming assets by banks.
 In the case of agricultural loans, NPAs have declared if the interest and/or installment of
principal remain unpaid for two harvest seasons.
o However, this period should not be longer than two years. Any unpaid
loan/installment will be classified as NPA after two years.

Classification of Non Performing Assets

 Sub-standard: When the NPAs have aged <= 12 months.
 Doubtful: When the NPAs have aged > 12 months.
 Loss assets: When the bank or its auditors have identified the loss, but it has not been
written off.

For Example, consider a commercial loan made on January 1st, 2015 with repayment date of
interest and principal amount on the 5th of every month. The firm stops its repayment and misses
its repayments from January 2016.

 The loan is classified as an NPA if there is no repayment by April 5, 2016.

 If it is not repaid after that it is called a sub-standard asset till April 5, 2017.
 If the repayment due is past April 5, 2017, then it is classified as a doubtful asset.
 When the bank decides it no longer can recover this commercial loan it is classified as
loss assets.

Reasons for rise of NPAs in India

Historical factors

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  Between the early 2000s and 2008, the Indian economy was booming. During this time, banks,
particularly public sector banks, lent heavily to businesses.
 However, due to a slowing global economy, a restriction on mining projects, and delays in
environmental-related licenses affecting the power, iron, and steel sectors, as well as volatility in
raw material prices and a scarcity of, most corporations' profits have declined.
 This has harmed their ability to repay loans and is the primary reason for the rise in
nonperforming assets (NPA) at public sector banks.

Relaxed lending norms

 One of the key causes of rising NPA is the loosening of lending standards, particularly for
corporate executives whose financial situation and credit rating are not thoroughly examined.
 In addition, in order to compete, banks are aggressively selling unsecured loans, which
contributes to the high level of nonperforming assets (NPAs).

Poor Contingency Plan

 Banks did not conduct enough contingency planning, particularly for managing project risk, due
to a lack of contingency planning.
 They did not account for contingencies such as the failure of gas projects to ensure gas supply or
the collapse of the highway land acquisition procedure.

Poor Restructuring and loan servicing

Restructuring of credit facilities was extended to enterprises with more serious over-leverage and
under-profitability issues. This issue was more prevalent in public sector banks.

Unforeseen conditions
Economic shocks such as demonetization and Covid 19 are unforeseeable.

The problem of Wilful Defaulters

 Diversification of finances into unrelated businesses or fraudulent activities.

 Due to a lack of diligence, there are lapses.
 Willful defaulters, for example, are the result of corporate malfeasance.

Poor Governance

 Loans become non-performing assets (NPAs) as a result of mismanagement and policy gridlock,
which slows down the timetable and speed of projects. Take, for instance, the Infrastructure
Sector.
 Land acquisition is being held up due to social, political, cultural, and environmental factors.
 Changes in the business/regulatory environment have resulted in business losses.
 Morale was low, especially after government loan forgiveness programs.

Unsustainable Competition
Intense competition in a specific market segment. Consider India's telecommunications industry.

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Impact of NPAs
 Twin Balance Sheet Syndrome: In which both banks and corporations have strained balance
sheets, leads the investment-led growth process to come to a halt.
 Judicial burden: Cases involving NPAs add to the pressure on the judiciary's already
overburdened docket.
 Reduced Profits: Profit margins for lenders are shrinking.
 Stress in the banking sector means less money is available to fund other projects, resulting in a
negative impact on the overall economy.
 Poor monetary policy transmission: Banks are raising interest rates to retain their profit
margins.
 Funds are being diverted from good initiatives to bad ones.
 Unemployment: As a result of the stagnation of investments, it is possible that unemployment
will result.
 Reduced revenue for the government: In the case of public sector banks, poor financial health
equals poor shareholder returns, which means the government of India receives less money as a
dividend. As a result, it may affect the ease with which money is used for social and
infrastructure development, resulting in social and political costs.
 Investors do not receive their due returns.

Measures to curb NPAs

Measures to curb NPAs in India
NPAs are not a new problem in India, and the government has taken many attempts to address
them at the legal, financial, and policy levels. The Narasimhan Committee suggested a number
of measures to deal with nonperforming assets (NPAs) in 1991. Some of them were put into
practice.

Debt Recovery Tribunals (DRTs)

 The Debt Recovery Tribunals (DRTs) were established in 1993.

 To reduce the amount of time it takes to settle matters. The requirements of the Recovery of Debt
Due to Banks and Financial Institutions Act, 1993, apply to them. However, because their
numbers are insufficient, they face a time lag, with cases in many locations pending for more than
two years.

Credit Information Bureau (CIB)

 In the year 2000, the Credit Information Bureau (CIB) was established.
 To avoid loans getting into the wrong hands and, as a result, NPAs, a good information system is
essential. Individual defaulters and wilful defaulters are tracked and shared, which aids banks.

Lok Adalats - 2001

They are useful in dealing with and recovering small loans, but the RBI guidelines established in
2001 limit them to loans of up to 5 lakh rupees. They are beneficial in that they prevent more
cases from entering the legal system.

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Compromise Settlement - 2000
For advances under Rs. 10 crores, it provides a straightforward route for NPA recovery. Willful
default and fraud cases are excluded. It covers lawsuits in courts and DRTs (Debt Recovery
Tribunals).

SARFAESI Act

 The SARFAESI Act (Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest) of 2002 - The Act allows banks and financial institutions to recover their
nonperforming assets (NPAs) without the participation of a court by acquiring and disposing of
secured assets in NPA accounts with an outstanding balance of Rs. 1 lakh or more.
 The banks must first send out a notification. They can then take the following actions if the
borrower fails to repay:
o Assume responsibility for security and/or management of the borrowing concern.
o Make a decision on who will be in charge of the problem.

Asset Reconstruction Companies (ARC)

Following the modification of the SARFAESI Act of 2002, the RBI has granted licenses to 14
additional ARCs. These businesses were formed in order to extract value from troubled loans.
Prior to the passage of this law, lenders could only enforce their security interests through the
courts, which was a lengthy procedure.

Restructuring of Corporate Debt – 2005

Its purpose is to reduce the company's debt burden by lowering the interest rates paid and
lengthening the time it takes to repay the debt.

5:25 rule

 The 5:25 rule was enacted in 2014.

 Flexible Structuring of Long-Term Project Loans to Infrastructure and Core Industries is another
name for it. It was suggested that such organizations maintain their cash flow because project
timelines are long and they do not receive money back into their books for a long time,
necessitating the need for loans every 5-7 years and therefore refinancing for long-term projects.

Joint Lenders Forum 2014

It came about as a result of the inclusion of all PSBs with stressed loans. It's there to prevent
many banks from lending to the same person or firm. It was created to prevent situations in
which a person accepts a loan from one bank in order to give a loan from another bank.

Indradhanush Framework – 2015

 Since banking nationalization in 1970, the Indradhanush framework for changing PSBs has been
the most comprehensive reform effort undertaken by ABCDEFG to remodel the PSBs and
improve their overall performance.
 Appointments: Based on worldwide best practices and guidelines in the Companies Act, a
distinct post of Chairman and Managing Director will be created, with the CEO receiving the
designation of MD & CEO, and a non-executive Chairman of PSBs would be appointed.

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  Bank Board Bureau: will replace the Appointments Board in the selection of Whole-time
Directors and non-Executive Chairman of PSBs.
 Capitalization: According to the finance ministry, the capital requirement for the next four years
up to FY 2019 is estimated to be around Rs.1,80,000 crore, of which the government will pay
70000 crores and PSBs will have to raise the remainder from the market.
 Destressing: De-stressing entails resolving concerns in the infrastructure sector in order to keep
stressed assets out of banks by bolstering asset reconstruction firms. The creation of a thriving
debt market for PSBs.
 Empowerment: PSBs should be given more flexibility and autonomy when it comes to
employing staff.
 A framework of Accountability: The banks will be evaluated based on a few key performance
indicators. It would include everything.
o Non-performing asset management, growth, diversification, return on capital, financial
inclusion, and other quantitative indicators
o Steps done to improve asset quality, human resource initiatives, and so on are examples
of qualitative parameters.
 Governance Reforms: Banker's Retreats or Gyan Sangam talks between bankers and
government officials to resolve banking sector concerns and determine the future course of
action.

SDR (Strategic Debt Restructuring)

 Under this program, banks that have provided a corporate borrower with a loan have the option to
convert all or part of their loan into equity shares in the company that has accepted the loan.
 Its main goal is to give promoters a bigger stake in rescuing stressed accounts and to give banks
better tools for initiating a change of ownership in appropriate instances.

Asset Quality Review (2015)

Classify stressed assets and make provisions for them in order to ensure the banks' long-term
viability. Identify stressed assets early and take appropriate steps to prevent them from becoming
stressed.

Sustainable Asset Structuring (S4A) 2016

 It's been designed as an optional framework for resolving accounts that are heavily pressured.
 It entails determining a stressed borrower's sustainable debt level and bifurcating outstanding debt
into sustainable debt and equity/quasi-equity instruments that are projected to deliver upside to
lenders if the borrower recovers.

Insolvency and Bankruptcy Code of 2016

 It was created to address the Chakravyuaha Challenge (Economic Survey) of India's exit problem.
 The goal of this law is to promote entrepreneurship, credit availability, and balance the interests
of all stakeholders by consolidating and amending the laws governing the timely reorganization
and insolvency resolution of corporate persons, partnership firms, and individuals, as well as
matters related to or incidental to such reorganization and insolvency resolution.

Public ARC vs. Private ARC 2017

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  This dispute, which was recently in the news, is about the idea of a public asset reconstruction
company (ARC) that is entirely funded and administered by the government, as suggested by this
year's Economic Survey, against a private ARC, as proposed by RBI deputy governor Mr. Viral
Acharya.
 PARA (Public Asset Rehabilitation Agency) is the name given to it by an economic survey, and
the proposal is based on the performance of a similar agency utilized during the East Asian crisis
of 1997.

Bad Banks 2017

 Economic survey 16-17 also mentions the establishment of a bad bank that will take on all
stressed loans and deal with them according to flexible regulations and mechanisms.
 It will help PSBs' balance sheets by giving them more room.

Conclusion
NPAs place a financial burden on the lender; a significant number of NPAs over time may
indicate to regulators that the bank's financial fitness is jeopardized. Lenders can recover their
losses by taking possession of any collateral or selling the loan to a collection agency at a
significant discount.

Non-performing assets (NPA) are loans or advances extended by financial institutions,

such as banks, that have stopped generating income for the lender. In other words, an
NPA is a loan or credit facility on which the borrower has failed to make interest or
principal payments for a specified period of time, typically 90 days or more.

NPAs are a major concern for financial institutions, as they can lead to significant
financial losses and affect their ability to extend credit to other borrowers. To mitigate
this risk, financial institutions employ various measures, such as debt restructuring, asset
recovery, and loan write-offs. Additionally, financial regulators set guidelines and norms
for the classification and provisioning of NPAs to ensure that banks maintain adequate
capital buffers and minimize the impact of NPAs on their balance sheets

Non-performing assets (NPAs) are loans or advances given by financial institutions such
as banks that have stopped generating income for the lender. In other words, these are
assets that are not producing any income for the lender, and the borrower has either
stopped paying the loan or is paying it irregularly.

NPAs can be of various types such as bad loans, non-performing advances, doubtful
loans, sub-standard loans, etc. The reasons for an asset to become an NPA could be
many, including economic slowdown, lack of cash flow, change in government policies,
frauds committed by borrowers, and so on.

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 For financial institutions, NPAs can be a significant concern as they can negatively
impact their financial health and profitability. This is because NPAs tie up the
institution's resources and restrict their ability to lend further, resulting in a decreased
ability to generate income.

To mitigate the risks associated with NPAs, financial institutions employ various
strategies such as loan restructuring, recovery, and asset reconstruction. They also take
measures to prevent the creation of NPAs by improving their credit appraisal and risk
management systems.

Problem of NPA in India

Non-performing assets (NPAs) have been a significant problem for the Indian banking
sector for many years. Here are some of the problems associated with NPAs in India:

1. Affects the health of the banking sector: NPAs negatively impact the health of the
banking sector as it ties up resources that could have been used for lending and
generating income. This results in reduced profitability, which can affect the financial
stability of the banking sector.
2. Economic impact: NPAs can have a negative impact on the overall economy as it
reduces the availability of credit and hinders economic growth. This is because banks
become cautious about lending, and the borrowing costs increase, which negatively
impacts the investment and consumption activity in the economy.
3. High provisioning requirement: Banks are required to make provisions for NPAs based
on the guidelines issued by the Reserve Bank of India. This results in a reduction of
profits, which affects the capital adequacy and ability of banks to lend further.
4. Legal and regulatory challenges: The process of recovering NPAs can be lengthy and
complex, involving legal and regulatory challenges. This leads to delays and additional
costs, which can negatively impact the financial position of banks.
5. Moral hazard: The government has often provided financial support to troubled banks,
which can create a moral hazard problem. This can encourage banks to engage in risky
lending practices as they may believe that they will be bailed out in case of losses.

To address the problem of NPAs in India, the government and the Reserve Bank of India
have taken various measures, including introducing the Insolvency and Bankruptcy
Code, setting up Asset Reconstruction Companies, and improving the credit appraisal
and risk management systems of banks.

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 Non-performing assets (NPAs) have been a major problem in the Indian banking sector
for many years. Here are some of the problems associated with NPAs in India:

1. Impact on Banks: NPAs adversely affect the financial health of banks, especially public
sector banks, which are the major players in the Indian banking sector. It restricts their
ability to lend further, leading to a decline in profits, lower credit ratings, and erosion of
shareholders' value.
2. Economic Impact: NPAs have a ripple effect on the economy. When banks face a higher
number of NPAs, they have less money to lend, which slows down economic growth. It
also affects the creditworthiness of the country, leading to a higher cost of borrowing
for the government and businesses.
3. High Levels of Stress: The Indian banking sector has been under high levels of stress due
to the high levels of NPAs. This has led to a decline in credit growth, which affects the
overall economic growth of the country.
4. Legal Challenges: Recovery of NPAs can be a long and complicated process, involving
legal challenges and a lack of proper infrastructure to manage the recovery process.
5. Ineffective Debt Recovery Mechanisms: In India, the legal system for debt recovery is
slow, leading to delays in recovery and a higher burden on banks. This has led to a lack
of confidence among lenders, resulting in a lower inflow of credit.

Overall, the problem of NPAs in India is a complex issue that requires a multi-pronged
approach involving improvements in credit appraisal, risk management, and debt
recovery mechanisms.

Gross non-performing assets (GNPAs) of banks have hit a six-year low of 5.9% as of
March 2022. But India’s NPA ratio is one of the highest among comparable countries,
says a report. Barring Russia, which has bad loans of 8.3%, every large market has
bad loans below India. China has NPA ratio 1.8%, while it is 2.6% for Indonesia and
5.2% for South Africa. Most of the developed economies have NPAs below 3%.
According to a report by CareEdge, bad loans will continue to drop during the current
financial year because of higher credit growth and the transfer of legacy assets to the
National Asset Reconstruction Company (NARCL)

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