Daily Current Affairs – 28th October,2016DEVENDRA VISHWAKARMA
Banking – Non Performing Assets
What are Non Performing Assets?
As per Reserve Bank of India (RBI), an asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A ‘Non-Performing Asset’ (NPA) was defined as a credit facility in respect of which the interest and/ or instalment of principal has remained ‘past due’ for a specified period of time. NPAs are further categorized depending upon the time periods for which the payments have been overdue.
Reasons for Non Performance
Gross bad loans at commercial banks could increase to 8.5 per cent of total advances by March 2017, from 7.6 per cent in March 2016, according to projections by the RBI in its Financial Stability Report released earlier this year during the tenure of Dr. Raghuram Rajan.
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A few important reasons for the constant increase of NPA are as follows:
- Global economic slowdown leading to a reduced demand
- Reckless lending by banks during periods of boom
- Lack of digitisation of banks and poor data management
- Poor quality of due diligence conducted by banks thus leading to poor loan appraisals
- Delay in implementation of infrastructure projects due to environment or regulatory hurdles
- Wilful defaults and frauds
Recent remedies and their impact
RBI has recently released the following guidelines to ease the pressure on the banking sector:
- Limit the lending by banks to corporate borrowers
- Restrict the overall lending to large borrowers gradually to Rs. 10,000 Crores by April 1, 2019.
- Corporates requiring loans in excess of specified limits will have to reach out directly to the market.
- Increased risk weights have been allocated for excessive lending and borrowing.
However, the above guidelines are not being viewed very positively due to the following concerns:
- Guidelines, such as allocation of increased risk weights, have added additional pressure on the lender and the borrower.
- Borrowing from the market can be tough for those companies suffering credibility issues and low investment ratings leading to slowdown of infrastructure development.
- The banks are moving towards alternative areas of credit expansion which have other limitations and constraints such as risk.
Alternatives investment avenues and limitations
- Retail Sector: Lending to the retail sector might not prove to be very fruitful due to low margins leading to higher risk and poor quality.
- Agricultural Sector: Banks are not very enthusiastic in lending to the farmers due to constant loan waivers given by the government.
- Investing beyond the Statutory Liquidity Limits (SLR): This will lead to increase in the fiscal deficit of the government.
- Bond Markets: Investment in bond markets are also restricted due to higher risk involved and limits imposed by RBI guidelines.
- Discipline in case of consortium lending and involvement of executives with sufficient and relevant expertise.
- Monitoring and strict scrutiny of utilisation of funds without solely relying on external auditors.
- Quality and on the field inspection of projects being implemented by expert branch officials.
- Steps should be taken to ensure both responsibility and accountability of lending banks who have taken to outsourcing.
- The role of credit committees sanctioning loans need to be revisited, in terms of increased accountability, especially in this age of digitisation where loan processing has become centralised. There are hardly ways to hold them accountable for their work.
- Online application procedures do increase the transparency, but they reduce the significance attached to the branch officials’ role. Critical processes such as background analysis, risk potential of borrowers are ignored.
- The short period of one month or 90 days, used for classifying NPAs, is inadequate to analyse the reasons for default and assess the genuine requirements of the borrower.
- Strict action against wilful defaulters.