The Reserve Bank of India defines non-performing assets (NPAs) in India as any advance or loan that has been past due for more than 90 days. To better align with worldwide practices, the RBI established the 90-day overdue criterion for recognizing NPAs, which became effective with the fiscal year ending March 31, 2004. Non-performing assets are classified into different classes based on how long they have been an NPA. Let’s break down what exactly an NPA is in the financial world, the different types of NPAs, how they impact the banking sector, gross NPA vs Net NPA, and how to reduce NPAs in banks.
What Is NPA in Banking?
By now, you must be familiar with what an asset is; its definition, functions, benefits, and how it works with other financial aspects. In simple words, an asset is anything that you can own. A loan is an asset to banks since the interest you pay on these loans is one of the bank’s most important sources of revenue.
When you, as a retail or corporate customer, are unable to pay the interest, the asset becomes ‘non-performing’ for the bank because it is not generating anything. As a result, the RBI has classified NPAs as assets that no longer generate income for the bank.
Types and Classification of NPAs
NPAs are categorized according to the duration for which they have been in the NPA category.
- Substandard Assets: A substandard asset is one that has been classed as an NPA for less than or equal to 12 months.
- Doubtful assets: A doubtful asset has been an NPA for more than 12 months.
- Loss Assets: A loss asset is one that is considered uncollectable and of such minimal value that it is no longer viable to treat it as a bankable asset. However, it may still retain some residual recovery value, which is why it hasn’t been fully written off from the bank’s books.
Gross NPA vs Net NPA: Key Differences
| Characteristic | Gross NPA (GNPA) | Net NPA (NNPA) |
| Definition | Total value of defaulted loans (unpaid principal + interest). | GNPA minus provisions for bad debts. |
| Calculation | Sum of all defaulted loans / gross advances. | (GNPA – provisions) / gross advances. |
| Default period | Recognized after the grace period ends. | Calculated immediately (no grace period). |
| Causes | Loan defaults due to economic factors, poor policies, natural calamities, etc. | Derived from GNPA after accounting for necessities. |
| Actual loss | Represents the total outstanding defaulted amount. | Reflects real loss after provisions (what the bank may not be able to recover). |
| Impact | Reduces asset quality; affects your trust. | Directly impacts liquidity & profitability (lower cash flow). |
Major Causes of NPAs in Indian Banks
- Economic slowdown: A sluggish economy reduces profitability for businesses, limiting their ability to service debt. During economic downturns, sectors including power, infrastructure, real estate, and manufacturing encounter cash flow problems, leading to bank loan defaults.
- Aggressive loan practices: During the mid-2000s boom, banks, notably public sector banks (PSBs), engaged in aggressive lending, often without conducting proper due diligence. Many loans were made to huge firms based on expected earnings and future growth, rather than present performance or collateral security.
- Political and crony capitalism: Political influence, particularly in PSBs, has resulted in loans being granted under duress to organizations with a bad track record. Crony capitalism, in which businessmen obtain big loans through political connections, has played a significant role in defaults and deliberate defaulters.
- Delay in project implementation: Land acquisition concerns, regulatory impediments, litigation, and environmental clearances are all common challenges for infrastructure projects in India. These delays raise project costs and disrupt financial flow, resulting in loan defaults.
- Global factors and commodity prices: Global market fluctuations and variable commodity prices (particularly steel, oil, and coal) have had an impact on export-oriented and core sectors. These price shocks reduce revenue, making it difficult for borrowers to service loans.
How NPAs Impact the Economy and Banking Sector
The effect of growing NPAs can be as follows:
- Rising NPAs damage the bank’s reputation, causing the public to lose trust in banks. You may withdraw your deposits, causing banks to have liquidity challenges.
- The shortage of liquidity prohibits banks from lending to other productive sectors of the economy. The reduction in investment may cause the economy to stall, resulting in unemployment, inflation, a bear market, and so on.
- To retain their profit margins, banks will be obliged to raise interest rates, further harming the economy.
NPAs erode bank profitability and lending capacity. When loans are not returned, banks are required to set aside provisions, reducing money available for new credit. This has implications for corporate growth, investment, and overall economic activity. High NPA levels also weaken your confidence in investing and raise your borrowing costs throughout the financial system, reducing credit availability to both you and companies. Over time, this can limit economic growth and place a strain on government budgets, particularly if public-sector banks require subsidies or recapitalization.
Strategies to Reduce NPAs in Banks
- Improving credit appraisal and risk management.
Banks must use a more rigorous and standardized method when examining loan applications. AI and Big Data analytics can improve credit profiles and payback behaviour. Risk-based pricing and exposure restrictions should be meticulously observed.
- Improving the Role of Credit Information Companies.
The increased usage of credit information bureaus such as CIBIL and Experian can assist banks in more correctly assessing the borrower’s creditworthiness. The regular sharing of data among financial organizations is crucial.
- Accountability for Loan Sanctioning.
It is critical to improve transparency and accountability in the loan approval process, particularly in PSBs. Bank officials must be held accountable for the negligent or biased approval of loans.
- Timely Monitoring and Auditing
Post-disbursement monitoring should be tightened. Banks should deploy dedicated teams for the continuous evaluation of large projects and use technology like satellite imagery for infrastructure and agricultural loans to verify progress.
- Asset Quality Review and Early Warning Systems.
The Reserve Bank of India (RBI) should periodically conduct Asset Quality Reviews (AQRs), and banks must establish Early Warning Systems (EWS) to identify stress in accounts before they become NPAs.
- Strengthening the Insolvency and Bankruptcy Code (IBC)
The IBC (2016) has improved recovery timelines, but challenges remain due to judicial delays and low-resolution rates. The government must address bottlenecks in the National Company Law Tribunal (NCLT) and improve creditor protection mechanisms.
Real-World Example of NPA in India
The Kingfisher Airline Case
Kingfisher Airlines loan default case was one of India’s most well-known NPA instances. The airline defaulted on loans of over ₹9,000 crore from the group of Indian banks led by SBI. Due to operational losses and mounting debt, the company was unable to repay its loans; hence, the accounts were classed as NPAs. This high-profile default had a significant influence on the banking system, resulting in legal fights, asset seizures, and tightened credit risk assessments. The case triggered a public debate over accountability and debt recovery in India’s banking system.
Conclusion
The rising flood of NPAs in India is the result of a mix of macroeconomic issues, poor governance, and structural flaws in the banking industry. While numerous projects have been launched to address the issue, a long-term solution would call for a multidimensional approach that includes changes to credit evaluation, monitoring, legal recovery, and governance structures. With ongoing alertness, proactive policies, and institutional resilience, India can effectively address the NPA problem and provide the groundwork for a strong, inclusive, and future-ready banking system.
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