Focus: GS-III Indian Economy, Economic Development
Why in news?
The Finance Ministry has asked the Reserve Bank of India (RBI) to relax asset classification norms for farm loans extended by banks following the stress faced by the agriculture sector.
What did the Ministries and Departments say?
- Finance Ministry requested to consider making appropriate relaxation in asset classification norms in respect of short-term agricultural crop loans for a period up to 30th June 2020.
- The Department of Agriculture, Cooperation and Farmers’ Welfare, Government of India, said that in view of the unprecedented situation prevailing in the country on account of increasing incidence of COVID-19 infection and consequent lockdown across the country, they are actively considering the possibility of extending the benefit of interest subvention and prompt repayment incentive to short-term crop agriculture loans falling due between 29th March 2020 and 30th June 2020, if the loans are repaid by 30th June 2020.
- They have further stated the extension of the repayment date would require relaxation in asset qualification by RBI.
Background
- The spread of COVID-19 has resulted in a lockdown across the country with economic and other activities coming to a grinding halt.
- As a result, industry and bankers have demanded a relaxation in bad loan norms, apart from economic stimulus from the government.
- A task force headed by finance minister Nirmala Sithararam has been formed to finalise an economic relied package.
What Is a Non-Performing Asset (NPA)?
- A nonperforming asset (NPA) refers to a classification for loans or advances that are in default or in arrears.
- A loan is in arrears when principal or interest payments are late or missed.
- A loan is in default when the lender considers the loan agreement to be broken and the debtor is unable to meet his obligations.
How do Non-Performing Assets (NPA) Work?
- Nonperforming assets are listed on the balance sheet of a bank or other financial institution.
- After a prolonged period of non-payment, the lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement.
- If no assets were pledged, the lender might write-off the asset as a bad debt and then sell it at a discount to a collection agency.
