A bold step in bank reform: 

A bold step in bank reform: 

Context:

• The Government of India recently introduced the recapitalization of public sector banks.

What are Non Performing Assets (NPAs)?

• A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
• Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
• 1. Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
• 2. Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
• 3. Loss assets: As per RBI, Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.

What are the reasons for the rise of NPAs?

• The banking sector has been facing the severe problems of the rising NPAs. Following are the major reasons:

External Factors:

• Ineffective recovery tribunal: The government has set an array of recovery tribunals, which works for recovery of loans and advances, due to their carelessness and ineffectiveness in their work the bank suffers the consequence of non-recover, their by reducing their profitability and liquidity.
• Natural calamities: Every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans.
• Thus the bank has to make large amount of provisions in order to pay damages those loans, hence end up the fiscal with a reduced profit.
• Industrial sickness: Inappropriate project handling , ineffective management , lack of adequate resources , lack of advance technology , day to day changing governemnt policies produce industrial sickness.
• Therefore the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity.

Internal Factors:

• Inappropriate technology: Proper Management Information System (MIS) and financial accounting system is not implemented in the banks, which leads to poor credit collection.
• Improper analysis: The inappropriate strength, weakness, opportunity and threat analysis is another reason for increase in NPAs.
• Poor Credit Appraisal: Deprived credit appraisal is an additional factor for the increase in NPAs, due to poor credit appraisal the bank gives advances to those who are not able to repay it back.

What steps has the  government  taken?

• Mission Indradhanush: Government has launched ‘Mission Indradhanush’ to make the working of public sector bank more transparent and professional in order to curb the menace of NPA in future.
• Insolvency and Bankruptcy Code, 2016 (IBC): It is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
• Reserve Bank of India: RBI introduced number of measures in last few years  which include:tightening the Corporate Debt Restructuring (CDR) mechanism,setting up a Joint Lenders’ Forum, prodding banks to disclose the real picture of bad loans,asking them to increase provisioning for stressed assets, introducing a 5:25 scheme where loans are to be amortized over 25 years with refinancing option after every 5  years, and empowering them to take majority control in defaulting companies under the Strategic Debt Restructuring (SDR) scheme.

What are the other measures to be taken?

• Proper and concrete government measures should be taken in order to get back the money extended to people as advances and loans.
• The banker should take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is competent of carrying it out successfully, he should be a person of integrity and good character.
• For a sound security system all the branches of the bank should be computerized.
• Banks should conduct necessary sensitivity analysis and contingency planning while appraising the projects.