The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
Abhishek Barui, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur
The gross NPAs of scheduled commercial banks stood at Rs 3.02 lakh crore for the year ending March 2015 or 4.6 % of total advances, most of them from the public sector banks. The NPAs has only grown since then. This suggests a high number of credit defaults affecting the profitability and the liquidity of the banking sector. This issue can be majorly attributed to the exposure of the banks to the Infrastructure sector which has faced torrid times due to slowdown in recent years.
The major reason for this problem is usually attributed to Economic slowdown. But the blame has to be shared the Government, RBI, banks and promoters. The corporate in the face of slowdown and high interest rates continued to borrow, while the banks continued to lend without adequate due diligence. RBI and Government too added to the problem by turning a blind eye to the whole issue by keeping the policies loose. The banks continued to play the wait and watch game when the asset quality deteriorated and in some cases provided the companies with restructuring option in the hope of revival.
The Government and banks are now trying to find solution to this menace. A Government setup Asset Restructuring Company (ARC) has been proposed by the Union Finance Ministry and Niti Aayog, which would take the stressed assets from the banks’ balance sheet. This would in turn help the banks to increase their lending activities when the economic growth picks up. But the major changes has to be made in the credit assessment process which should take economic factors into consideration in addition to the financial statements of the company. The banks should also work hand in hand to identify the willful defaulters and make lending decisions. Only through discipline and a framework can this problem of NPA be solved.