Q.14 Briefly highlight the major reasons for recent upsurge in the NPAs of the public sector banks and also describe the steps taken by the RBI to check them.

Ans. An upsurge has been seen in the non-performing assets (NPAs) of the public sector banks in the past few years. As per the official sources (Economic Surveys), the main reasons for this unpsurge have been as given below—

(i) Switchover to system-based identification of NPAs;

(ii) Current macroeconomic 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.

(vi) ‘Twin balance sheet’ problem hitting banks as well as the corporate sector.

The RBI has taken several initiatives to resolve the NPA issue by ealry 2017. The steps taken under it are:

(a) 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.

(b) Flexibility brought in project loans to infrastructure and core industry projects, both existing and new.

(c) 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’.

(d) 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.

(e) Independent evaluation of large-value restructuring (above Rs. 500 crore) made mandatory.

(f) 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.

(g) 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.

(h) Incentives to banks to quickly and collectively agree to a resolution plan. Meanwhile, the Economic Survey 2016–17 has advised the Government to

set up a public sector assets rehabilitation agency (naming PARA) to solve the ‘twin balance sheet’ problem which will also resolve the NPAs crisis of the public sector banks, too.