Non-Performing Assets: What? Why? Solutions Ahead!
What is NPA?
An asset becomes NPA, when it ceases to generate income for the lending bank. According to a July 2014 RBI circular, all advances where interest and/or instalment of principal remains due for more than 90 days, would be classified as a “nonperforming asset”. In case of overdraft or cash credit, if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power for more than 90 days, it would be classified as an NPA.
How much is the NPA?
There are various figures from various sources, and NPAs are floating variable changing almost daily.
- For the year ending March 2015, gross NPAs of SCB stood at Rs 3 lakh crore, in absolute terms, or 4.6 percent of advances. 6 months later, this rose to 5.1%. [Source: RBI Bulletin]
- The stressed advances ratio – bad loans plus loans that have been restructured by banks – increased to 11.3% in September 2015
- Private estimates vary between 17.5% to 25% of all banks advances. This is what we keep hearing in news mongering, which quotes India’s gross NPAs as Rs 10 – Rs 14 lakh crores.
It can be said to be combination of many factors
- Policy Paralysis at the end of the previous UPA-2 regime, led to stall of projects
- Land Acquisition has become a major hurdle in project completions, especially infrastructure. This happened after passing of new LARR Act, 2013, which had stringent norms.
- Also, Banks have been found to be lending recklessly, leading to bad projects being financed (recent news about Vijay Mallaya can be referred)
- RBI under Raghuram Rajan has decided to clear the mess, even if bank’s balance sheet looks bad.
- Implicit connivance between politicians and business barons is not debatable, and politicians affecting decisions at highest levels.
- Lack of proper pre appraisal
- Willful defaults and misappropriation of funds
- The biggest reason would be, that the projects, especially awarded under PPP mode, has not been able to provide sufficient (or projected) returns.
Now that we have realized that NPAs are hurting us more than ever, government (and/or NITI AYOG) and RBI has took pledge to solve the issue. Let’s see what are on card!
It has to be a mix of solutions. (It can also be read through Economic Survey 2015-16. I’m providing here a summary of sorts)
- 5: 25 Rule by RBI: where loans are to be amortized over 25 years with refinancing option after every five years
- Strategic Debt Restructuring: empowering them to take majority control in defaulting companies
- Corporate Debt Restructuring
- Setting up of Joint Lenders Forums
- Insolvency and Bankruptcy Code: stronger bankruptcy lawsprotect the rights of borrowers and lenders, promote predictability, clarify the risks associated with lending, and make the collection of debt through bankruptcy proceedings more attractive. These factors ultimately facilitate credit and thus a higher flow of capital in the economy.
- Committee set up by government in this regard has given following recommendations
- Early recognition of financial distress and timely intervention as key features of efficient rescue regimes and believes that the degree of viability of a company must be the central consideration for allowing it to be rescued, and that an unviable company should be liquidated as soon as possible to minimize losses for stakeholders.
- They recommend that secured creditors be allowed to file an application for the rescue of a company at a sufficiently early stage, rather than wait for the company to have defaulted on 50 per cent of its outstanding debt, as currently provided for in the Companies Act, 2013.
- The Committee suggests that unsecured creditors representing 25 per cent of the debt be allowed to initiate rescue proceedings against the debtor company.
- The report also focusses on individual insolvency, a crucial area covering sole proprietorships and small and medium enterprises in India.
- Asset Restructuring Companies (ARC) Reforms
- Possible inclusion of government, but this can be controversial step, as then it would involve using tax money as savior.
- Government sought IMF advice on this, for international best practices.
- New models to finance projects (which has lesser risks than PPP mode)
- Hybrid Annuity Model
- EPC Model
- SEBI has notified that willful defaulters can no longer be a part of board of “to be” enlisted companies or companies seeking enlistment
It is a foregone conclusion that the mess has been created by participation of all factors and all stakeholders need to take the accountability and proceed with internal reforms. The tax payer’s money can’t be used for refinancing of banks, which has lent spuriously. It is a moral hazard.