Context:
According to information provided by the Reserve Bank of India (RBI) in response to an RTI query, scheduled commercial banks (SCBs) have written off non-performing assets (NPAs), or bad loans, amounting to over Rs 10,57,000 crore in the last five years.
Relevance:
GS3- Indian Economy
Mains Question:
In the context of Non-Performing Assets in the Indian Banking sector, analyse the efficacy of government’s efforts to ensure that no new NPAs are created while also making the defaulters pay. (15 marks, 250 words).
About an NPA:
- A loan turns into an NPA when interest and/or principal payments remain overdue for more than 90 days.
- There are three scenarios for a borrower landing in this predicament:
- Firstly, if the bank officials conduct thorough due diligence and monitor the loan’s utilization, enterprise performance, and profitability, the chances of the loan becoming an NPA are minimal. External factors, like the impact of the Covid pandemic, might contribute to such cases.
- Secondly, if officials grant loans without proper diligence or tracking mechanisms, there is a higher likelihood of these loans turning into NPAs.
- Thirdly, if the bank’s top management, disregarding due diligence, engages in mala fide practices under a “quid pro quo” arrangement, the loan is almost certain to become an NPA, as it was issued with no intention of repayment.
Statistics Pertaining to NPA:
- During the opening of the budget session in February 2018, the Prime Minister stated that there was a significant proliferation of loans directed by the ruling political establishment to favored industrialists and businessmen between 2008 and 2014. The bulk of these loans, given in the second and third categories, were likely to become NPAs.
- RBI data on the addition of new NPAs as a percentage of the opening balance between 2009-10 and 2015-16 supports this claim.
- After 2015-16, the NPA ratio consistently fell, indicating increased caution in loan approval, particularly in public sector banks (PSBs).
- An asset quality review (AQR) was initiated in 2015, revealing a high gross NPA figure of Rs 10,36,000 crore as of March 31, 2018. The banks, following RBI guidelines, wrote off these NPAs to reflect their true financial health, emphasizing that it is not a loan waiver.
Initiatives in this Regard and their Outcomes:
- To expedite recovery efforts, the government enacted the Insolvency and Bankruptcy Code (IBC) in 2016. The government further toughened measures against willful defaulters, denying additional facilities and debarring them from accessing capital markets.
- According to information presented by the Ministry of Finance (MoF) in Parliament over the past nine years, scheduled commercial banks (SCBs) have successfully recovered a cumulative amount of Rs 10,16,617 crore from non-performing assets (NPAs). In this recovery process, the Central government allocated approximately Rs 300,000 crore in budgetary support to bolster the capital of public sector banks (PSBs) from 2016 to 2021.
- Additionally, in the 2021-22 budget, the government pledged an additional Rs 200,000 crore through a sovereign guarantee for the security receipts (SRs) issued by the National Asset Reconstruction Company Limited (NARCL), where the majority shareholding is held by PSBs.
- After accounting for the government’s contribution of Rs 500,000 crore, banks were still able to recover a substantial amount of Rs 516,617 crore from defaulters. However, the recovery could have been more substantial were it not for the legal obstacles in the insolvency proceedings under the Insolvency and Bankruptcy Code (IBC).
- The decisions made by the National Company Law Tribunal (NCLT), the designated authority for such matters, are subject to appeal in the National Company Law Appellate Tribunal (NCLAT), the High Court, and the Supreme Court (SC), causing delays as major defaulters typically opt for appeals.
Conclusion:
The IBC framework has induced a fundamental shift in borrower behavior. The fear of losing control over their businesses due to continued default has prompted many borrowers to settle their outstanding dues. Additionally, a series of governance reforms in PSBs has motivated banks to promptly identify and report stressed assets, implementing rigorous measures for their recovery.
