Bad loans and Non-Performing Assets (NPAs)

Bad loans and Non-Performing Assets (NPAs)

Why in news :

• Recently Finance Minister Nirmala Sitharaman told Parliament that banks had written off bad loans worth ₹10,09,511 crore during the last five financial years.

What are bad loans and NPAs :

• A bad loan is that which has not been ‘serviced’ for a certain period.
• It is that loan for which neither the interest nor the principal is paid.

Classification of NPAs :

• In 2009, the RBI brought out norms that set out categories of NPAs and the steps banks must do as these bad loans aged.
• Banks are required to furnish a Report on NPAs as on 31^stMarch each year after completion of audit.
• Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues:
  1. Sub-standard Assets
  2. Doubtful Assets
  3. Loss Assets

1. Sub-standard Assets :
   • A sub-standard asset is one, which has remained NPA for a period less than or equal to 12 months.
2. Doubtful Assets :
   • Doubtful asset was one, which remained NPA for a period exceeding two years.
   • An asset is to be classified as doubtful, if it has remained NPA for a period exceeding 12 months.
3. Loss assets :
   • When the bank decides and designates that the loan cannot be recovered then it is classified as loss assets.

Classification of bad loans and Non-Performing Assets :

• Once the asset is classified as the NPA then the bank should keep certain percentage of the loan so as to cover the risk.
• The various provisioning norms are mentioned in the table below:

The need to identify the NPAs :

• Rise in NPAs will weaken the whole financial system. A weak financial system can eventually ruin lives and livelihoods.
• To prevent the evergreening : Evergreening means lending more to an already stressed asset in the hope that it could be brought back to its feet.
• Lock up of capital and loss of capital.

Government initiatives to identify the NPAs :

• Asset Quality Review of banks regularly.
• A National Asset Reconstruction Company Ltd. (NARCL) was announced in the Union Budget for 2021­2022 to resolve stressed loans amounting to about ₹2 lakh crore in phases.

Syllabus : Prelims + Mains; GS3 – Issues related to Indian Economy