23 Sep 2023 Non-Performing Assets (NPAs)
This article covers “Daily Current Affairs” and the Topic details “Non-Performing Assets (NPAs)”. This Topic has relevance in the Economy section of the UPSC CSE exam.
For Prelims:
About Non-Performing Assets (NPAs)?
For Mains:
GS 3: Economy
Impact of Non-Performing Assets (NPAs)?
Current NPA Situation in India?
Why in the news:
The Reserve Bank of India (RBI) has recently proposed that lenders should classify a borrower as a “wilful defaulter” within six months of their account being declared a non-performing asset (NPA).
About Non-Performing Assets (NPAs)
Non-Performing Assets (NPAs) are financial assets, typically loans or advances, that have not met their scheduled principal or interest payment obligations for a specified period, usually 90 days or more. Here’s a rephrased explanation:
- Definition of NPAs: NPAs are loans or advances for which the borrower has failed to make principal or interest payments for a period exceeding 90 days.
- Asset Status for Banks: For banks, loans are considered assets because the interest income generated from these loans is a significant source of revenue. When borrowers, whether retail or corporate, are unable to make interest payments, these assets become “non-performing” for the bank as they cease to generate income.
- RBI’s Definition: The Reserve Bank of India (RBI) defines NPAs as assets that no longer contribute to a bank’s income.
- Disclosure Requirements: Banks are obligated to publicly disclose their NPA figures and report them to the RBI regularly.
- Classification of NPAs: According to RBI guidelines, NPAs are categorized into three classes:
- Substandard Assets: Those that have been NPAs for up to 12 months.
- Doubtful Assets: Assets that have remained substandard for 12 months.
- Loss Assets: Assets with minimal recovery value, deemed uncollectible, and not considered bankable assets.
- NPA Provisioning: Provision for a loan involves setting aside a certain percentage of the loan amount by banks. The standard provisioning rate for loans in Indian banks ranges from 5% to 20%, depending on factors like the business sector and the borrower’s repayment capacity. However, under Basel-III norms, 100% provisioning is required for NPAs.
- GNPA and NNPA: Two key metrics assess the NPA situation of a bank:
- Gross Non-Performing Assets (GNPA): It represents the total value of NPAs for a bank within a specific quarter or financial year.
- Net Non-Performing Assets (NNPA): NNPA is derived by subtracting the provisions made by the bank from the gross NPA. It provides the actual value of NPAs after accounting for specific provisions.
- NPA Ratios: NPAs can also be expressed as a percentage of total advances, providing insights into the unrecoverable portion of the loan portfolio. For instance:
- GNPA Ratio: This is the ratio of total GNPA to total advances.
- NNPA Ratio: It calculates the ratio of net NPA to total advances, offering a more accurate picture of the NPA situation after accounting for provisions.
Impact of Non-Performing Assets (NPAs):
- Reduced Lending Capacity: Banks face constraints in allocating funds for productive economic activities due to the presence of NPAs.
- Interest Rate Hikes: To maintain profitability, banks may be compelled to raise interest rates on loans.
- Unemployment Concerns: A decrease in investments stemming from NPA issues can potentially lead to an increase in unemployment rates.
- Handling NPAs: Banks have two primary options for dealing with NPAs: they can either retain them in their records with hopes of eventual recovery, make provisions for them, or completely write off the loans as bad debt.
Current NPA Situation in India:
- As per the latest RBI Financial Stability Report, the gross NPA ratio for scheduled commercial banks (SCBs) in India reached a 10-year low of 3.9% in March 2023.
- Both gross and net NPA ratios have declined significantly from their peak levels in March 2018, standing at 3.9% and 1.0% in March 2023, respectively.
- A notable reason for the reduction in gross NPA levels in 2022-23 was the substantial write-offs undertaken by banks.
Prediction for India:
- Stress test results suggest that the gross NPA ratio for all SCBs may improve to 3.6% by March 2024.
- However, in scenarios where the macroeconomic environment deteriorates to a medium or severe stress level, the gross NPA ratio could increase to 4.1% and 5.1%, respectively.
Download Yojna daily current affairs eng med 23rd Sep 2023
Q.1 Which of the following statements regarding Non-Performing Assets (NPAs) in India are correct?
- NPAs are loans or advances for which interest payment is overdue for a period exceeding 60 days.
- Net Non-Performing Assets (NNPA) represent the total value of NPAs without accounting for provisions made by the bank.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
ANSWER: B
Q.2 Which of the following statements regarding Non-Performing Assets (NPAs) and their impact in India are true?
- Lower NPAs generally result in banks decreasing interest rates on loans.
- The NNPA Ratio offers a more accurate picture of the NPA situation.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
ANSWER: C
Q.3 The management of Non-Performing Assets (NPAs) has far-reaching implications for India’s banking sector and the broader economy. Analyze
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