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Non-Performing Assets (NPAs) are the bad loans of the banks. The criteria to identify such assets have been changing over the time. In order to follow international best practices and to ensure greater transparency, the RBI shifted to the current policy in 2004. Under it, a loan is considered NPA if it has not been serviced for one term (i.e., 90 days). This is known as ‘90 day’ overdue norm. For agriculture loans the period is tied with the period of the concerned crops—ranging from two crop seasons to one year overdue norm.32
NPAs were classified into three types:
(a) Sub-standard: remaining NPAs for less than or equal to 18 months;
(b) Doubtful: remaining NPAs for more than 18 months; and
(c) Loss assets: where the loss has been identified by the bank or internal/external auditors or the RBI inspection, but the amount has not been written off.
• It was 9.1 per cent of total loans by September 2016, double their year-
ago level. Equally striking was the concentration of these bad loans. More than 80 per cent of the NPAs were in the PSBs (public sector banks), where the NPA ratio had reached almost 12 per cent.
• Meanwhile, on the corporate side around 40 per cent of the corporate debt was owed by companies which had an interest coverage ratio (ICR) less than 1 (it means that these companies did not earn enough to pay even the interest on their loans).
It means, India is suffering from a twin balance sheet (TBS) problem, where both the banking and private corporate sectors were under stress. Not just a small amount of stress, but one of the highest degrees of stress in the world. At its current level, India’s NPA ratio is higher than any other major emerging market (except Russia’s 9.2 per cent), higher even than the peak levels seen in Korea (of 8.9 per cent) during the East Asian crisis of mid- 1990s.
The main reasons for unprecedented increase in the NPAs of the banks have been as given below (as per various volumes of the Economic Survey including that of 2016–17):
(i) Switchover to system-based identification of NPAs;
(ii) Current macro-economic situation in the country;
(iii) Increased interest rates in the recent past;
(iv) Lower economic growth; and
(v) Aggressive lending by banks in the past, especially during good times. The RBI came out with a new guidelines to resolve the NPA issue by early
2014. The steps taken under it are :
(i) Banks have to start acting as soon as a sign of stress is noticed in a borrower’s actions and not wait for it to become an NPA. Banks to carve out as special category of assets termed special mention accounts (SMAs) in which early signs of stress are visible.
(ii) Flexibility brought in project loans to infrastructure and core industry projects, both existing and new.
(iii) Non-cooperative borrowers in NPAs resolution will have to pay higher interest for any future borrowing. Banks will also be required to make
higher provisions for further loans extended to borrowers who are considered to be ‘non-cooperative’.
(iv) Towards strengthening recovery from non-cooperative borrowers, the norms for asset reconstruction companies (ARC) have been tightened, whereby the minimum investment in security receipts should be 15 per cent, as against the earlier norm of 5 per cent.
(v) Independent evaluation of large-value restructuring (above Rs. 500 crore) made mandatory.
(vi) If a borrower’s interest or principal payments are overdue by more than 60 days, a Joint Lenders’ Forum to be formed by the bankers for early resolution of stress.
(vii) The RBI has set up a central repository of information on large credits to collect, store and disseminate credit data to lenders. For this, banks need to furnish credit information on all their borrowers with an exposure of Rs.5 crore and above.
(viii) Incentives to banks to quickly and collectively agree to a resolution plan.
The RBI guidelines announced since early 2014 aimed at checking the NPAs from rising have not been effective due one or the other reason, as per the Economic Survey 2016-17, and the situation needs a deeper and multi- dimensional analyses.
At one hand, while the RBI tried to check the NPAs from rising by announcing new guidelines for the banks, on the other hand, it has also taken several steps to ‘resolve’ the problem. By February 2017 (since 2014-15), the RBI has implemented a number of schemes to facilitate resolution of the NPAs problem of the banks—briefly discussed below:
5/25 Refinancing: This scheme offered a larger window for revival of stressed assets in the infrastructure sectors and 8 core industries. Under this scheme lenders were allowed to extend the tenure of loans to 25 years with interest rates adjusted every 5 years, so tenure of the loans matches the long gestation period in the sectors. The scheme thus aimed to improve the credit
profile and liquidity position of borrowers, while allowing banks to treat these loans as standard in their balance sheets, reducing provisioning costs against NPAs. However, with amortisation spread out over a longer period, this arrangement also meant that the companies faced a higher interest burden, which they found difficult to repay, forcing banks to extend additional loans (called ‘evergreening’). This in turn has aggravated the initial problem.
ARCs (Asset Reconstruction Companies): ARCs were introduced to India under the SARFAESI Act (2002), as specialists to resolve the burden of NPAs. But the ARCs (most are privately-owned) finding it difficult to resolve the NPAs they purchased, are today only willing to purchase such loans at low prices. As a result, banks have been unwilling to sell them loans on a large scale. Since (2014) the fee structure of the ARCs was modified (requiring ARCs to pay a greater proportion of the purchase price up-front in cash to the banks) purchases of NPAs by them have slowed down further— only about 5 per cent of total NPAs were sold during 2014-15 and 2015-16.
SDR (Strategic Debt Restructuring): In June 2015, RBI came up with the SDR scheme provide an opportunity to banks to convert debt of companies (whose stressed assets were restructured but which could not finally fulfil the conditions attached to such restructuring) to 51 per cent equity and sell them to the highest bidders—ownership change takes place in it. By end-December 2016, only 2 such sales had materialized, in part because many firms remained financially unviable, since only a small portion of their debt had been converted to equity.
AQR (Asset Quality Review): Resolution of the problem of bad assets requires sound recognition of such assets. Therefore, the RBI emphasized AQR, to verify that banks were assessing loans in line with RBI loan classification rules. Any deviations from such rules were to be rectified by March 2016.
S4A (Scheme for Sustainable Structuring of Stressed Assets): Introduced in June 2016, in it, an independent agency is hired by the banks which decides as how much of the stressed debt of a company is ‘sustainable’. The rest (‘unsustainable’) is converted into equity and preference shares. Unlike the SDR arrangement, this involves no change in the ownership of the company.