Introduction:
Non-performing assets (NPAs) refer to loans or advances where principal or interest payments remain overdue for 90 days or more. Despite a decrease from 11.5% in 2018 to 3.9% in FY 2023, NPAs remain a significant concern in the banking sector.
Body:
Non-Performing Asset (NPA) Classification:
Reasons for the Persistence of the NPA Crisis in the Indian Banking Sector:
- Slow NPA Resolution: Merely 484 out of 4,376 cases under the Insolvency and Bankruptcy Code (IBC) have been resolved, indicating a substantial backlog in unresolved cases.
- Sector-Specific Challenges: Sectors like power, with NPAs amounting to ₹1.02 lakh crore ($14 billion) as of March 2021, pose hurdles to overall resolution efforts.
- Economic Slowdown and Pandemic Impact: The pandemic and economic slowdown have contributed to an increase in gross NPAs, projected to reach 9.8% by March 2022.
- Governance and Regulatory Issues: Weak corporate governance practices and lax regulatory oversight have exacerbated the NPA crisis.
- Evergreening of Loans: Practices like evergreening perpetuate the NPA problem.
Actions Taken by the Government of India:
- Recognition of NPAs: Asset Quality Review (AQR) in 2015 and Credit Information Bureau (India) Ltd. (CIBIL) establishment in 2000 to prevent NPAs.
- Resolution and Recovery: Implementation of Insolvency and Bankruptcy Code (IBC), Asset Reconstruction Companies (ARCs), and the SARFAESI Act.
- Recapitalization of Public Sector Banks (PSBs): PSBs received a recapitalization of Rs. 3.12 lakh crore over the past four financial years.
- Reforms in PSBs and Financial Ecosystem: Board-approved loan policies, third-party data sources for due diligence, and specialized monitoring agencies for effective oversight.
Way Forward:
- Establishment of a Bad Bank to manage NPAs, allowing banks to focus on core lending activities.
- Implementation of Nayak Committee recommendations, including Bank Board Bureau’s role in appointments and reducing government stake in PSBs.
- Enhanced credit appraisal, penalties for wrongdoing, and strengthening RBI governance and regulation.
- Diagnostics for willful default and prevention of evergreening of loans through penalties and accountability measures.
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