Essay on NPAs (Non-Performing Assets ) one of the biggest problems of today's banking system | MBA colleges in Bangalore

Posted by Suganya.S On 10/02/2022 11:06:25

When a bank offers a loan, it charges interest on the amount, which is why it is regarded as an asset to the bank. When the borrower stops paying the interest, the principal, or both, the lender loses money. Such a loan then becomes a non-performing asset (NPA) for the bank. The banking industry in India is seriously affected by the NPA crisis with the rising number of defaulters. MBA in business analytics


As per the Reserve Bank of India (RBI), a loan is considered a “bad loan”, or an NPA when the interest due for any quarter is not fully paid within 90 days from the end of the quarter. However, this time period may vary based on the terms and conditions agreed upon by the bank and the borrower.

A commonly accepted definition of NPA is: “An asset, including a leased asset, becomes nonperforming when it ceases to generate income for the bank.” Best MBA college in Bangalore

Possible Reasons for Rising NPA in Banking

Credit Boom: The problem of rising NPA was magnified during the credit boom of 2003-04. During this time, the world economy, as well as the Indian economy, was booming; hence, multiple Indian firms borrowed a lot to avail of the growth opportunities.

Tightened Monetary Policy: The RBI followed a tightened monetary policy at that time, increasing the repo rate and reserve repo rate. However, even after that, there was credit expansion that led to a rising NPA ratio.

Stalled Judicial & Legislative Procedures: The judgments given by courts at the time were not in favor of businesses; and had an adverse impact, especially on the mining, power, and steel sectors. Moreover, businesses faced problems in acquiring land, which led to many projects getting stalled.

The combination of the above factors, along with regulatory control, made it difficult for companies to repay the loans. Some of the other factors that made the NPA crisis even worse are:

  • Severe competition in specific market segments
  • Natural reasons, like a flood, drought, earthquake, etc.
  • Misgovernance and policy paralysis affected the timeline, thereby, increasing the project cost (for example, in the infrastructure sector)
  • Maladministration by corporates
  • The slowdown in specific industry segments

Initiatives to Tackle the NPA Crisis in Banking

Although it has risen disproportionately in contemporary times, NPA is not a new problem. Over the years, there have been several reform measures undertaken by the government at various levels to bring it down. Some of the important ones are:

  • Debts Recovery Tribunal (Procedure) Rules - 1993
  • The Credit Information Bureau (India) Ltd - 2000
  • Lok Adalats -2001
  • Compromise Settlement - 2001
  • SARFAESI Act – 2002
  • Asset Reconstruction Companies (ARC)
  • Corporate Debt Restructuring - 2005
  • Joint Lenders’ Forum - 2014
  • Mission Indradhanush - 2015
  • Strategic Debt Restructuring - 2015
  • Asset Quality Review - 2015
  • Sustainable Structuring of Stressed Assets - 2016
  • Insolvency and Bankruptcy Code - 2016
  • Public ARC Vs Private ARC - 2017
  • Resolution of NPA Crisis in India

The need of the hour is to understand the criticality of the NPA crisis and take appropriate remedial action. These actions should include:

  • Using data analysis and technologically upgraded frameworks to identify the warning signs early
  • Formulation of Mechanisms to identify hidden NPAs
  • Development of internal skills for efficient credit assessment.
  • Conducting forensic audits to understand the intent of the borrower.

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