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Non-Performing Assets – Way Forward For Banks

Non-Performing Assets – Way Forward For Banks

UPSC CSE Mains Syllabus: GS-3- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Non-Performing Assets – Way Forward For Banks

Supreme Court decision on NPA:

  • The Supreme Court has asked banks to not classify stressed accounts of borrowers under duress as non-performing assets (NPAs).This is laudable.
  • However, the directive will put the health of the banking system in jeopardy.
  • Non-performing asset:
  • A non-performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.

    Description: Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.

    1. Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.

    2. Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.

    3. Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”

Issues with the decision:

  • Clearly, the regulator—not the government—should frame the broad rules, regulations and guidelines within which banks must operate.
  • But, banks must have full discretion to deal with individual clients in the manner they feel best since they are held responsible for the exposures.
  • Interference in lending practices for so many decades—including the notorious practice of phone banking—is the reason that the system is so full of rot.
  • Not classifying assets properly, on a real-time basis, is poor corporate governance; shareholders have the right to know the true state and quality of the loan book at any point in time.
  • Given the unprecedented circumstances of the pandemic, the Reserve Bank of India (RBI), has decided to permit a one-time recast of stressed loans.
  • But, this will, presumably, be done only for a select set of companies.
  • Those that have been badly hurt by the lockdown and need support.
  • A blanket non-classifying of stressed assets will, however, create a moral hazard.
  • As senior bankers had pointed out, the blanket moratorium offered to customers resulted in rampant indiscipline since every borrower decided to take a break from paying interest. Indeed, it is surprising that there has been such a long debate on intertest waiver—during the moratorium period—and that the matter is still being heard in court.

Other issues faced by the bank:

Already, banks are so reluctant to lend they are content to leave funds lying with RBI for a paltry 3.35% or park them in government bonds at 5.8-6%. Taxpayers are still paying for the loan losses for the banking system, which at one point had crossed 12% of assets. Today, with the economy contracting and the IBC suspended, banks are becoming increasingly vulnerable to large loan losses.

Source: “Financial Express”.

Possible UPSC Mains Question:

What are the issues of high NPA’s in banking sector? Critically examine the recent decision of the Supreme Court asking banks to not classify stressed accounts of borrowers as non-performing assets (NPAs).