ASSESS THE CHALLENGES AND OPPORTUNITIES PRESENTED BY NON

PERFORMING ASSET IN THE INDIAN BANKING SECTOR ? HOW ARE DIFFERENT

BANKS AND FINANCIAL IINSTITUTION ADDRESSING THE ISSUE OF NPA?
If borrower has not paid the principal or interest amount or both after 90 days of the due date
then the loan is classsofied as NPA

Non-Performing Assets (NPAs) are loans or advances issued by banks or stitutions that no
longer bring in money for the lender since the borrower has failed to make payments on the
principal and interest of the loan for at least 90 days.

The gross NPA ratio in India crossed 11% in March 2015, reaching a peak of 11.50%. This marked
a significant challenge for the Indian banking sector and raised concerns about financial
stability.India’s banking sector is facing the daunting challenge of growing incidence of loan
failures, which has resulted in substantial rise in the accumulation of non-performing assets
(NPAs). The mammoth volume of NPAs is a matter of concern as it can potentially affect the
stability of the banking system

after Continued economic recovery, effective resolution mechanisms like the IBC, and proactive
bank management tool could lead to a further reduction in the NPA ratio, potentially reaching
3.5% by March 2024 as predicted by S&P Global.

NPA is classified into two parts

1) Sub standard asset ; Here borrower has not paid the interest / principal or both the amount
after 90 days of its due date . but considerd as recoverable with a significant decrease in the
value.

2) DOUBT FULL ASSET ; under this case borrower has not paid the interest / prinicapal amount
or both amount after 90 days of its due date but this is considered as irrecoverable amount.

CHALLENGES Of NPA

· Due to npa financial loss increses which impact the profitability and financial stability of
the banking sector .

· High npa leads to lower lending and borrowing which leads to slower economic growth

· In case of unable to recover their loan banks have to write off the debt which leads to
decrease the in their capital adequacy ratio and impacting their ability to lend in the
future
 · due to write off the asest causes negative impact on the banks reputation and erode the
investors confidence

· NPA impact on the society is bad . the borrower who are unable to pay their loans may
face legal actions leading to stress and anxiety . this can have ripple effect on their family
and communities

OPPORTUNITIES OF NPA NPA can also present opportunities for the society which are as
follows

DEBT RESTRUCTURING Negotiate repayment plans with borrowers, potentially offering lower
interest rates, extended terms, or debt-equity swaps. This can generate income while avoiding
complete write-off.

Data & Analytics: Analysis of NPA data to identify patterns, understand root causes, and
improve future lending practices. This can mitigate risks and enhance loan quality.

NPA issue is not country specific issue . all economies of the world then or now facing the
problem of npa and every country has opt different measure to dwell with it . here are different
measures to tackle npa by the differeent countries in different time

in india RBI plays a key role in this regard .RBI issued the SDR scheme ( STRATEGIC DEBT
RECONSTRUCTING ) scheme which allows the bank to convert their debt into equity in the
companies that have defaulted on their loan .

under this bank can take the control of the distressed company and bring in new management
to turn it around . this can helps banks recover their due amount and avoid write off

Another measures taken by RBI is S4A ( SCHEME FOR SUSTAINABLE STRUCTURING OF

STRESSED ASSET) it hepls resturcture the debt of the company facing finacial difficulties .Banks
convert a portion of their debt into equity or other instruments to make it more manageable for
the borrowe . this hepls companies overcome their financial difficculties and become viable
again

IBC INTRODUCED in 2016 ; IBC ( insolvency and bankruptcy code ) addrssing the issues of npa .
it provides framwork for the resolution of stressed asset and allow creditors to initiate
insolvency procedure against the defaulting borrower . this has helped and improve the
recovery rate for banks and financial institution

GUIDELINES FOR LOANS CLASSIFICATION & PROVISIONING

RBI raised guidelines regarding loan clasification as per their repayment status and provision for
potential losses . this can helps banks to identify potential risk early on & take measures to
mitigate them.

US TRAP ; the US tRAP ( trouble asset relief programme ) implemented in 2008 in response to
the subprime mortgage crisis . it is designed to provide the financial assistance to the banks and
other financial institutions that were struggling with npa. under the US TRAP US treasury
department purchased the troubled asset from the banks and in return inject the capital into
struggling institutions and provide guarantee on certain types of debt . the US TRAP
programme was controversial and faced severe criticism for bailing out large finacial institutions
with taxpayers money

SWEDISH MODEL implemented in early 1990 in response of banking crisis under this
nationalisation of troubled banks and asset transfer to the govt owned bad banks and
recaptilisation of the banking system . the swedish model is often cited as an exanple of
successful approach to rsolving banking crisis

IN JAPAN in japan to deal with npa govt implemented a programme to purchase non
performing loans from the banks and transfer them to govt owned corporation

IN spain govt implemented to set up a bad bank to manage the asset of troubled banks

CONCLUSION

future outlook of inflation in indian banking sector is complex and multifaceted . while there are
challenges to resolving this npa problem then and there are also some opportunities for growth
and innovation

It is important for banks , regulators and the govt to work together to implement the effective
solutions and ensure tthe stability and growth of the bankim=ng sector

NPA generates various opportunities and challenges for banks and

financial institutions, they are as follows:

OTHERS IMPORTANT POINTS

1) Unbearable Tax Liability: Banks can ignore unbearable tax through the practice of
write-offs, banks write off their NPAs from their default list, and this practice clears the
balance sheets but from the nation point of view this is not justified.
2) Profitability Decreases: With the increasing NPAs the lending resources of banks start
decreasing, and there are also no more options for banks to invest in the market.
3) Negative Market Sentiments: Default loans hurt the customers to deposit in the banks
as they think banks will be unable to pay back their cash when demanded. The image of the
banks and confidence among customers starts declining with this problem.
4) Twin Balance Sheet Problem: This problem arises when the loan defaults and bad
loans by the corporation rise mutually. This issue has haunted the Indian economy for many
years, albeit under different terminologies and structures.
5) Willful defaulters: They are the borrowers who can manage to repay the loans but
choose to not pay the loan. This list includes some famous recognitions like Vijay Mallya and
Mehul Choksi.
Besides all these problems banks managed to decline the NPAs steadily. As per the data,
the cases of NPAs in Mar 2018 were 14.6% declined to 5.3% in Dec 2022. This is due to the
strict actions taken by the Reserve Bank of India and the Government of India, banks can
now cater for this problem through various means such as:
1) Asset Reconstruction Companies: Banks and financial institutions can sell their bad
loans to the ARCs and improve their balance sheets. The first-ever ARC in India was Arcil
established in 2002.
2) Lok Adalats: The union budget of 2021-22 released NARCL(National Asset
Reconstruction And Clearing Corporation Ltd) and IDRCL (Indian Debt Recovery
Construction Ltd) to act as bad banks. Banks can transfer their NPAs to these bad banks.
3) SARFAESI Act: Securitization and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 (SARFAESI) allowed banks to audit the commercial and
residential properties of the borrowers and sell them to get their money back. This will be
helpful in case of willful defaulters.
4) DRT (Debt Recovery Tribunal): The Debt Recovery Tribunal was established for the
speedy recovery of bad loans in India under the Recovery and Bankruptcy Act, of 1993.
There are a total of 39 DRTs present in India at the current time.

INTRO purpose

Asset quality is one the imporatant parameter to measure the robustness of the banking system. The
assets of the banks have to perform well to maintain the stability in the banking system. After the
Global Financial Crisis, the Indian banking system faced the problem of non-performing assets(NPAs)
and the problem has aggravated thereafter wherin the Gross NPA(GNPA) reached to around 12% in
2013. To improve the situation, both government and RBI took initiatives and the banking system is
quite prudent in current time. As per the latest “Report on Trends and Progress of Banking in India
2022-23”, the GNPA of scheduled commercial banks has reduced to 3.2% at the end of September,
2023.
Challenges Presented by NPAs in the Indian Banking Sector
 Reduced Profitability- According to regulations, banks have to do provisioning against the loans
and advances based on the risk weightage. If more NPAs will be there in the banks, more
provisioning would be required which will stuck the capital of the banks leading to less
profitability.
 Capital Erosion- Since more provisioning is needed to back the NPAs, it erodes the capita