Rising NPAs in banking—Cause , effects and remedies
NPA- Non performing assets means the assets which ceased to generate interest or income for the banks. NPA has been a major concernfor banks for banking sector. In 1969, government decided to nationalized banks so that Indian economy can grow and societies which are not uplifted can get credit at lower interest rate, But this has given rise to NPA and banks profits had reduced after that. In 1991, Narsimhan committee reports came and that give recommendations to reduce the NPA of banks.
Banking is the backbone of an economy. Failure of banking sectors may have an impact on other sectors as well. Rising no. of NPA in banks means larger no. of defaults and less amount of profit.
Causes of NPA-
1) Twin balance sheet problem- It is the major issue currently in India. Banks lent fund to corporate to fund their business but because of less growth and less demand, they don’t get that much of profit, and not able to pay back to the banks. This problem directly affects country and its GDP.
2) Wrong lending decision- Without checking proper credibility of a customer or on the basis of his/her status, banks provide loan. For example- Vijay Mallya, banks lend to him on the basis of his shareholding and status without keeping any collateral and now the result is in front of us.
3) Funds lent for the particular project might not have been used for that particular purpose is also a cause of NPA because if that funds will not generate profit for that customer will make him not able to pay back to the banks.
4) Under financing- It is also another cause of NPA. For example – a farmer needs 10 lakh for particular purpose but banks can provide upto 6 lac. Now for rest of the amount, he will go to the unorganized sector which will charge high interest rate. Now in this case, he has to return firstly to these sectors because of high interest rate and it make vulnerable him to pay back to the banks.
5) Over financing—A person needs less but get more funds as per his project. Now he will use that rest funds in another project, it might cause loss to him and make him vulnerable again to pay back.
6) Business failure or can say startup failure can also be a cause.
7) Willful defaulters are the main reason for the NPA problem.
Effects of NPA-
1) As NPA will rises, Few banks will be willing to lend to the people which may leads to the scarcity of funds.
2) Banks will be needed more capital which will increase their cost of funds that may arise the situation of financial crisis. It may lead towards merger of banks.
3) If banks stop lending to the people, it will shoot the interest rates in the market which will arise the situation of inflation in the economy.
Steps taken by RBI and government in last years to curb NPA
1) Insolvency and Bankruptcy code was passed by the parliament to deal with insolvency of corporate, individuals and entities. It was the most needed reform to deal with twin balance sheet problem.
2) Corporate debt restructuring is also another step. It is the reorganization of company’s debt by reducing the burden of debts of the company by decreasing the interest rate and increasing the time period.
3) Government has launched mission Indradhanush to make working of public sector banks more transparent and professional in order to curb the menace of NPA in future.
How to curb the NPA
1) Review of the advances which has been made by the banks. Banks can check it by seeing that is the funds lent have been used for the correct project, or more funds are required. If in case, more funds need to be lent, banks can restructure the debt amount.
2) Check the history of the borrowe- Whoever is taking loan, either it is an individual or a corporate, banks should go through their historical transaction record which is available with CIBIL.
3) Banks should check out the project feasibility of any startup or business before lending fund to them.
4) Restructuring process need to be fast so that stress accounts can be resolved in time.
5) Contrary to popular perceptions, The NPA in non corporate sector is less than corporate sector. So by maximizing lending base can also help in reducing NPA
We says that PSL sector is the major cause of NPA, but in recent findings, Corporate sectors are the biggest defaulters and are the major cause of NPA. . Hence, bank can make efforts to reach rural areas by adopting new technologies and new means. Innovative business models will play a crucial role here. Otherwise, the NPAs may increase instead of decreasing. NPA needs to curb because it poses a big threat to the economic stability and growth. By taking right and timely steps can be help in reducing problems of NPA in banking sectors.