Tackling the NPA Explosion

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 Any material borrowed from published and unpublished sources has been appropriately referenced.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.

Sachin Mehta, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

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“Rich people take crore and crore of rupees and declare insolvency while the poor farmers are suffering.”

29 states on banks have written off as much as 1.14 lakh crore rupees of bad debts between financial years of 2013 and 2015 much more than they had done in preceding nine years. The RBI says while bad debt stood at ₹15,551 crore for financial year ending March 2012, they had shot up by three times by the end of March 2015.

The question that arises here is that what has hit India’s ₹95 trillion banking sector? One of the major problems is that the banking sector has lost the ability to collect. Also, the lending of huge amounts under the various new schemes has been discrete which is adding a huge burden on the banking sector of India.

While economic growth remains the immediate solution to this problem, India is in desperate need of an appropriate bankruptcy law to help tackle the NPA problem in a more meaningful way. Reforms in bankruptcy laws can play a crucial role in economic growth and financial stability. According to RBI, all new restructured loans are to be classified as bad loans. A restructured loan is one for which the borrower has renegotiated the terms of repayment, while a bad loan is where the borrower has not made payments for a certain period and there is risk of default.

The basic idea is to disincentivise banks from opting to restructure loans on the slightest pretext to prevent them from qualifying as NPAs. The new rule is expected to force banks to recall loans, take early recovery action or sell NPAs to asset restructuring companies. The bankruptcy law can prove to be beneficial in tackling the burgeoning NPA issue.

Considering the effect of NPA on capital and liquidity position of the bank, the need for banks to reduce their stressed assets and clean up their balance sheets is the most compelling if they are to help sustain growth in the economy.

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