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  • The stressed assets are getting increased attention as the trend of deteriorating asset quality has emerged as a big economic risk for the Indian banking sector. The ratio of stressed assets to gross advances of the Indian banking system is increasing from 2013 onwards. On the banking side, stressed assets now stand at over 12% of the total loans in the banking system.

What are stressed assets?

  • Stressed assets comprise of restructured loans and written off assets besides NPAs.

Stressed assets = NPAs + Restructured loans + Written off assets


What is an NPA?

  • A loan whose interest and/or installment of principal have remained ‘overdue ‘ (not paid) for a period of 90 days is considered as NPA.
  • Where the installment of principal or interest thereon remains overdue for two crop seasons for short duration crops.
  • Where the installment of principal or interest thereon remains overdue for one crop season for long duration crops.

What are restructured loans?

  • The assets which got an extended repayment period, reduced interest rate, converting a part of the loan into equity, or providing additional financing, so that the loan could be recovered.

What is written off asset?

  • Written off assets are those the bank or lender doesn’t count the money borrower owes to it. The financial statement of the bank will indicate that the written off loans are taken off the financial statement.


So, is there a difference between NPA and Stressed Assets?

Yes. NPAs are non performing assets i.e. loans on which bank has not received payments even 90 days after due. Some of these NPAs at later stage go into restructurings. These are no longer classified as NPAs once restructuring is done and new arrangements have been entered into with the corporate borrower. Stressed assets include both gross NPAs (GNPAs) and restructured loans.

Extent of India’s bad loans problem


Reasons for growth of stressed assets

  1. Diversion of funds by companies for purposes other than for which loans were taken.
  2. Due diligence not done in initial disbursement of loans. Eg: loans given to road sector even before acquisition of land by the contractors.
  3. In the absence of adequate governance mechanism, double leveraging by corporates, as pointed out by RBI’s Financial Stability Report, is also a reason for increasing bad loans.
  4. Crony capitalism is also to be blamed. Under political pressure banks are compelled to provide loans for certain sectors which are mostly stressed.
  5. In the absence of a proper bankruptcy law, corporate faced exit barriers which led to piling up of bad loans.


Impact of stressed assets on Banks

  1. They lead to banks having lesser capital to deploy, shareholders losing money and banks finding it tough to survive in the market.
  2. In light of attaining the Bessel norms, the burden on maintaining Capital Adequacy Ratio increases as their loans have failed to yield results.
  3. It also affects the competitive position of banks.
  4. The banks become more circumspect in giving loans which affect the credit offtake in economy. This leads to declining Gross Capital Formation affecting economic growth.
  5. Rising of NPAs will lead to a crisis of confidence in the market. The price of loans, i.e. the interest rates will shoot up for infrastructural, industrial projects etc.
  6. This will hurt the overall demand in the Indian economy which will lead to lower growth rates and of course higher inflation because of the higher cost of capital.
  7. The trend may continue in a vicious circle and deepen the crisis.


 What are the various steps taken to tackle NPAs in India?

1.In the year 1991, Narsimham committee recommended many reforms to tackle NPAs.

  1. The Debt Recovery Tribunals (DRTs) – 1993
  • These were set up to decrease the time required for settling cases. They are governed by the provisions of the Recovery of Debt Due to Banks and Financial Institutions Act, 1993.
  1. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002
  • The Act permits Banks / Financial Institutions to recover their NPAs without the involvement of the Court, through acquiring and disposing of the secured assets in NPA accounts with an outstanding amount of Rs. 1 lakh and above. The banks have to first issue a notice. Then, on the borrower’s failure to repay, they can:
  • Take ownership of security and/or
  • Control over the management of the borrowing concern.
  • Appoint a person to manage the concern.
  1. ARC (Asset Reconstruction Companies)
  • These companies are created to unlock value from stressed loans. Before this law came, lenders could enforce their security interests only through courts, which was a time-consuming process.
  1. Corporate Debt Restructuring – 2005
  • It is for reducing the burden of the debts on the company by decreasing the rates paid and increasing the time the company has to pay the obligation back.
  1. 5:25 rule – 2014
  • It is also known as, Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries. It was proposed for existing and new projects greater than 500 crores and also for existing projects which have been classified as bad debt or stressed asset.
  • Under it, bank can provide longer amortization periods of 25 years with the option of restructuring loans every 5 or 7 years. The advantage of this scheme is that it provides for longer lending period with inbuilt flexibility.

7. Joint Lenders Forum – 2014

  • It was created by the inclusion of all PSBs whose loans have become stressed. It is present so as to avoid loan to same individual or company from different banks.
  • It is formulated to prevent the instances where one person takes a loan from one bank to give a loan of the other bank.

8. Mission Indradhanush – 2015

The Indradhanush framework for transforming the PSBs represents the most comprehensive reform effort undertaken since banking nationalization in the year 1970 to revamp the Public Sector Banks (PSBs) and improve their overall performance by ABCDEFG.

  • A-Appointments 
  • B-Bank Board Bureau
  • C-Capitalization
  • D-Destressing
  • E-Employment 
  • F-Framework of Accountability
  • G-Governance Reforms 


  1. Strategic debt restructuring (SDR) – 2015
  • Under this scheme banks who have given loans to a corporate borrower gets the right to convert the complete or part of their loans into equity shares in the loan taken company.
  • Its basic purpose is to ensure that more stake of promoters in reviving stressed accounts and providing banks with enhanced capabilities for initiating a change of ownership in appropriate cases.

10.Sustainable Structuring of Stressed Assets (S4A) – 2016

  • It involves the determination of sustainable debt level for a stressed borrower and bifurcation of the outstanding debt into sustainable debt and equity/quasi-equity instruments which are expected to provide upside to the lenders when the borrower turns around.

11.Insolvency and Bankruptcy Code Act-2016

  • It aims to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner and for maximization of value of assets of such persons and matters connected therewith or incidental thereto.
  1. Ordinance to amend the Banking Regulation Act, 1949 to give more powers to the Reserve Bank of India to take action against defaulters to solve the NPA crisis. The ordinance gives the RBI powers to:
  • Issue directions to any bank to initiate insolvency resolution process in case of default,
  • Issue directions to the banking companies for resolution of stressed assets and,
  • Specify one or more authority or committee that will advise banks on how to resolve their stressed assets.
  1. Bad Banks – 2017
  • Economic survey 16-17, talks about the formation of a bad bank which will take all the stressed loans and it will tackle it according to flexible rules and mechanism. It will ease the balance sheet of PSBs giving them the space to fund new projects and continue the funding of development projects.

Analyzing the idea of a Bad Bank

  • Economic Survey 2016-17, pushed for the creation of a bad bank in the form of centralized Public Sector Asset Rehabilitation Agency (PARA) to better deal with stressed assets.
  • Setting up bad banks in India would centralize the sale of stressed assets and lead to a quick resolution.
  • However, setting up a bad bank is a very complex process. A one-size-fits-all approach to designing a bad bank can be very expensive and less effective.
  • The most efficient approach would be to design solutions tailor-made for different parts of India’s bad loan problem. The bad loan problem in India is concentrated in a few sectors like infrastructure and basic metals.
  • An effective solution would be to transfer bad loans from these distressed sectors into sector-specific SPVs, securitize them and sell them in an auction


Solution and way ahead

India’s banking sector has been under stress from a considerable amount of time. Given the growth of financial institutions today and the current growth rate of our economy, we need to improve its health. Suggestions to strengthen the banking sector are as follows

  • Robust evaluation of loans: The fundamental reason behind rising NPAs is lack of robust evaluation of debtor before advancing loans. Moreover, periodic AQR- Asset Quality Review should be undertaken.
  • Capital: Banks need to find multiple avenues to raise their capital especially to meet BASEL-3 Capital Adequacy Ratio
  • Asset Recovery Mechanism: It needs to be strong. DRT, SARFAESI Act and ARCs have not been able to perform effectively
  • Management: The political interference in coercing public sector banks to lend difficult to recover loans for populist measures and lack of professionalism in appointing heads need to be addressed.
  • A special Bank association which only work in the field of debt recovery, policy making, and implementation wing.
  • Close watch on NPA by picking up early warning signals and ensuring corrective action.


Pooja Chaudhary is an author at UPSC MEME. She loves to write and she is here to help IAS aspirants understand contemporary issues with her extensive knowledge and lucid language.

​Loan Waivers: Benefits and Hazards


What began with the UP government’s announcement in April, followed by Maharashtra, yet another BJP-ruled state, has now been emulated by Punjab and Karnataka where the Congress is in power. The loan waiver amounts vary from Rs 50,000 in Karnataka to Rs one lakh each in UP and Maharashtra, and up to Rs 2 lakh in Punjab. While the UP and Punjab schemes target those with less than five acres holding, the Karnataka and Maharashtra waivers seem to extend to all farmers, albeit restricted only to loans taken from cooperative banks. 

These events have raised a warning from the RBI Governor against loan waivers. Recently, Union Minister M Venkaiah Naidu has remarked that seeking agriculture loan waiver has become a “fashion”.

What is farm credit?

Farm credit, as defined by the Reserve Bank of India, includes short-term crop loans and medium-term or long-term credit to farmers. Farm loans may be crop loans or investment loans taken to buy equipment.

Short-term crop loans are basically borrowings by farmers for six months or a maximum one year to help them raise money before and after harvest. So, banks disburse loans for a range of activities such as buying fertilisers, harvesting, spraying, sorting, grading and transportation of produce to the nearest market.

For other activities such as irrigation and farm development or buying of equipment, lenders provide loans for a longer period — for more than a year.

What are farm loans waivers?

Both farmers and banks reap a good harvest when all is well. But when there is a poor monsoon or natural calamity, farmers may be unable to repay loans. The rural distress in such situations often prompts States or the Centre to offer relief — reduction or complete waiver of loans.

Waivers are usually selective — only certain loan types, categories of farmers or loan sources may qualify. They may offer complete waiver also.

Who pays the bill for such populist measures? 

  • Normally the government pays or promises to pay the banks who are too fragile to absorb such high.
  • Banks may also offer the banks SLR status bonds, so that they can sell it in the market and get reimbursed. If the SLR status is not given then the banks are not willing to give the states a long lease by way of tenure, they would be interested in short term bonds which can be encashed sooner than later.

Are banks obliged to lend to farmers?

Yes. In categories defined as priority sector for lending, agriculture is virtually at the top besides small and medium enterprises and housing, export, education and social infrastructure. So 40% of bank credit has to be earmarked for the priority sector with a target set for foreign banks in India too.

Within this, there is a sub-limit of 18% for agriculture. Even within this 18%, the RBI has set a target of 8% for small and marginal farmers. Lenders who fail to achieve this target will have to contribute to the Rural Infrastructure Development Fund or RIDF, handled by the central government for making good the shortfall.

Is there a cap on interest rates on banks set by the regulator or the government?

Banks have to lend at a maximum rate of 7% to farmers with the government offering a subsidy of 3% to borrowers who are prompt in repayment. What the government, which controls a large number of state-owned banks, does is subvention or in other words compensation to banks for lending at such low rates.

Why is there competition among state governments to write off farm loans?

It is not just state governments but also successive central governments that have waived farm loans.

It may be a political move but in many cases, farmers have been unable to repay because of crop failures or when there is a bumper crop — as has been the case this time and they have to reckon with low prices offered for their produce, including what is called the minimum support price or MSP.

Over time, it has evolved as a political measure for vote bank politics.

What are the reasons for loan waivers?

There are varied reasons ranging from issues such as— fragmented land holding, depleting water table levels, deteriorating soil quality, rising input costs, low productivity, vagaries of the monsoon.

Output prices may not be remunerative. Farmers are often forced to borrow to manage expenses.

Also, many small farmers not eligible for bank credit borrow at exorbitant interest rates from private sources. When nature rides roughshod over debt-ridden farmers in the form of erratic monsoon and crop failures, they face grim options. Indebtedness is a key reason for the many farmer suicides in the country. This makes the government announce schemes like this.

Criticisms of loan waivers

Though loan waivers provide some relief to farmers in such situations, but there are debates about the long-term effectiveness of the measure.

They tend to make agriculture sustainable by reducing inefficiencies, increasing income, reducing costs and providing protection through insurance schemes.

Such measures can erode credit discipline and may make banks wary of lending to farmers in the future.

Loan waivers encourage farmers to willfully default and make even the healthy commercial banks wary of lending crop loans to the farmers. It will mean that each state will then have to find the resources or money to fulfill such promises, which in turn means higher borrowings and perhaps lower spending on development or infrastructure.

To the extent that they impose fiscal costs, these schemes also entail diversion of public resources that could have gone to build rural roads, hospitals, schools and irrigation works.

Have such moves helped farmers in the past?

Various studies have been done in this regard.

In 2014, the Indian Banks Association, the lobbying arm of Indian banks, cautioned the Finance Ministry about the negative impact on the loan repayment culture and credit discipline in the country.

Studies done by the Kolkata based Indian Statistical Institute and the World Bank have showed that loan waiver is not a solution to Indian agriculture mess. Honest farmers repaying the loan also turned defaulters after the waiver.

A 2015 ICRIER paper said the massive write-off of loans in 2008 took its toll on the banks, increasing the non-performing assets of commercial banks threefold between 2009-10 and 2012-13.

Long term solutions for farm distress:

There are various solutions which can be used to solve the problems of agricultural distress:

  • Encouraging farmers to use hybrid seeds, Mixed farming, New technology like intensive rice cultivation
  • Bringing all farmers under new fasal bima yojana.
  • Using satellites to see pest attack n informing timely to farmer about it.
  • Bringing farmer under social security schemes or giving pension to them
  • Use of Mnrega workers in farmers field or paying themselves in doing the work.
  • Horticulture should be encouraged.
  • Reforming Mandis through APMC act and removing middleman.
  • Encouraging big consumer companies like Reliance, Amazon, to buy directly from farmers.
  • Setting agrobased industry, cold storage etc

Way ahead:

India needs massive investment in areas such as irrigation, water conservation, better storage facilities, market connectivity and agricultural research.

The problems in Indian agriculture are structural. They need long-term solutions. Loan waivers will only end up complicating the problem. It’s time parties and governments addressed the real issues.

A loan write-off would be worth it if it specifically targets farmers who have fallen out of the institutional credit system. These farmers, and also those who have always been dependent on borrowing from local moneylenders and traders, have every right to be able to access formal finance that makes them more productive.

But farmers would be better helped if they are allowed to realist remunerative prices for their produce. Better price realizations, not blanket waivers, is what farmers really require today.

Pooja Chaudhary is an author at UPSC MEME. She loves to write and she is here to help IAS aspirants understand contemporary issues with her extensive knowledge and lucid language.


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