Understanding Non Performing Assets and Banking Crisis in India

 NPA: It is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.

In India Banks are required to classify NPAs further into Substandard (period of less than or equal to 12 months), Doubtful (equal to 12 months) and Loss assets (Uncollectible)

• ₹10.3 trillion, or 11.2% of advances, in March 2018
• Public sector banks (PSBs) accounted for ₹8.9 trillion, or 86%, of the total NPAs.
• The ratio of gross NPA to advances in PSBs was 14.6%.
  

How did this come about from ₹566 billion in 2007-08?

• Credit boom of the years 2004-05 to 2008-09 > Business wanted to in-cash the boom period > Large and unchecked loans were assigned 
• Financial crisis of 2008 + Stalled growth rate in the following years
• Bad Monsoon in 2012 and 2013 due to EL-Nino > agriculture growth rate was significantly low > low transition of growth 
• Establishment of NGT (2010) and other Green movements hindered the development projects > increased the project cost and dwindled the financial feasibility. > all these responsible for looming NPA crisis.

Tightening norms of RBI:

• RBI's assessment that NPA is under-reported > brings new norms for banks > NPA got doubled in just one year from 2015 to 2016. 
• PSBs higher exposure to — mining, iron and steel, textiles, infrastructure and aviation 
• All these are beyond the control of banking sector  i.e. (dumping, tariff war, environmental clearance issues and global oil industry variability due to political reasons). This provides the explanation for why PSBs has major share in NPA than private. On the other hand PSBs are used to fund unfeasible projects due to political interference which is not the case with private banks

Government Response to The Crisis: 

• Recapitalization of the PSBs.
• The government initiated the Indra Dhanush program to revamp the PSU banks.
• To set up a Bank Board Bureau to facilitate the appointment of top officials at the PSBs
• Set to merger major small banks with the larger one > increase efficiency & economies of scale 
• New Insolvency code Bill 

RBIs Response to the Crisis: 

• Better guidelines and clearance in definitions and loans.
• Forced banks to maintain risk to dept ratio
• Preventive mechanisms such as take the managerial role from regulatory role in case of major mismanagement.