Bad Bank and NPA
“If banks cannot truly be customers intimate, they are doomed to be just dumb
commodities; acting behind the scenes, like utilities”. But somewhere this is
misunderstood and that is now bad loans are NPA. Suppose SBI gives a loan of Rs. 10 Crores to a company (Kingfisher Airlines). Consider that they agreed upon an interest 10%
per annum. Initially, everything was good and market forces are supporting the airline industry. Therefore the company was able to pay the interest amounts later,
due to technical reasons the company did not pay interest rates for 90 days. This is called NPA. So, NPA means it is a credit facility in respect of which interest on the installment of principal has remained as ‘post due’ for a specified time generally 90 days
in India.
If once the borrower has failed to make interest or principal payments for 90 days it
is also called as NPA. The account remains ‘out of order’ for a period of 90 days or more in
respect of Over Draft / Cash Credit.
NPA’S are categorized into 3 types: Substandard Assets:
The assets which remain as NPA for a period not exceeding 12 months are called substandard. These have to be maintained 15% of its reserves in the bank.
Doubtful Assets: The assets which remain as NPA for a period exceeding 12
months.
Loss Assets: It is when the assets has been identified by bank or internal or
external auditor or central bank inspector. But the amount has been written off wholly or
partly.
OVERVIEW ON NPA:
According to RBI an asset including a leased asset become NPA.
When it ceases to generate income for a bank. NPA affected countries are
1.CHINA
2.SOUTH AFRICA
3.BRAZIL
4.RUSSIA
5.INDIA
To lessen NPA’S they are some advanced tools which help to detect fraud. For an
instance, Experian India's Hunter Fraud Score have launched work on data mining and
calculate some genuine score that can help banks to detect fraud and lower the loses.
How serious is India's bad loan problem?
a.More the Rs 1 lakh crores worth loans are as NPA’S in India.
b.Roughly 10% of loans that were given are nerve paid back which results in
substantial loss of money to banks.
c.When reconstructed and unorganized assets are added the total stress would
be 15-20% of total loans.
d.The bad performance is not a good sign and can result in the crashing of banks
which was happened in 2008 USA I.e; Sub Prime crisis.
e.NPA problem in INDIA is worst when comparing, other emergency economics
in BRICS. And even ‘ Reconstructing norms are being misused’.
Reasons for NPA’S:
i. Diversification of funds to unrelated bussiness or fraud.
ii. Lapses due to careless work.
iii. Business loses due to change in business or regulatory environment.
iv. Lack of confidence, particularly when government schemes which had waive loans.
v. Due to severe competition ( Telecom sector in India )
vi. Cheap import due to dumping leads to business loss of domestic companies.
High concern cases on NPA:➢ SBI, PNB which is mired in the 11,400 crore Nirav Modi scam and IDBI Bank
limited top the list of bank loans given out by PSB'S in terms of quantum of loan
amount.
➢ Vijay Mallaya case: A consortium of 17 banks led by SBI has filed a case to recover
duls worth over Rs. 9000 crores
➢ Rotomac case: The CBI has quizZed 6 otficials of Bank of Baroda in connection with
Rs. 3695 crores bank fund. Rotamac pen company and its directors i.e. Vikram
Kothat and Rahul Kothari, Sadhana Kothari 7 banks led by Bank of Baroda had
charges of cheating.
Impact on Indian Economy:
Lender suffer lowering of profit margins. Stress in banking sector causes less money
available to fund other projects ie., negative impact on larger economy. Higher interest
rates by banks to maintain profit margin. investment gets struck, it may result in
unemployment. In case of public sector banks the bad health of banks means a bad return
for a share holder. I.e., GOI gets less money as dividend which results in social and political
costs. Balance sheet syndrome in India characterizes both banks & corporate sector have
stressed the investment by halting it.
Will bad bank effect deposits?
If loans become bad, banks will fail to make profit and cannot serve interest to depositors
and meet their expenses. Ultimately they will incure loss and banks failure. Apprehending
deposits loss customers will try to withdraw entire deposits from banks and there may be a run on banks.
According to Rating Agency (CARE) as of June 2017, SBI leads the list of scheduled banks
with highest NPA.
According to financial stability report 2017 released by RBI states that India's gross
NPA'S stands at 9.6%. IDBI 24.11%, IOB-23.6%, Kotak 2.58%, HDFC - 1.24% and SBI
9.97% (ratio's). PARA (Public Sectors Asset Rehabilitation Agency)- PARA colloquialy
called as Bad Bank' is to assume the NPA of public sector banks in India to deal with
recovery of bad loans. It has been proposed in Economic Survey 2016-2017. The main
function of it is to charge the most difficult cases and make political decisions to reduce
debt.
Steps taken by Government:
➔ Mission Indradhanush for Banks: It is a 7 pronged plan launched by government of
India to resolve issues faced by public sector banks. It aims to revamp their
functioning them to compete with private sector banks. 7 parts are appointments,
Banks board bureau capitalization, de-stressing, empowerment, framework of
accountability and governance
reforms.
➔ Amendment in law making of banks ie. to give more power to RBI.
➔ RBI's loan restructuring schemes.
➔ Recapitalization of PSB'S- bonds and budgetary allocation ➔ Prompt corrective actions by RBI for PSB's.
➔ Reforms within the working of the bank
i. Asset quality review
ii. Cautious lending
iii. Capital adequacy Ratio as per Basel IlI norms
iv. Bankruptcy laws.
v. Revenue Recovery Act.
CONCLUSION:
The NPA's are the outcome of credit activity of the bank which is important to earn profit.
By considering all NPA problems the solutions has to be designed with consideration o1
political economy of India. For all these we need a larger committee to speedily vet loan
write of. It is advisable to constitute a Loan Resolution Authority by an Act of Parliament.
Bank and government should work in Tandem.
-E. LALITHA
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