- 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
- Diversion of funds by companies for purposes other than for which loans were taken.
- Due diligence not done in initial disbursement of loans. Eg: loans given to road sector even before acquisition of land by the contractors.
- 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.
- Crony capitalism is also to be blamed. Under political pressure banks are compelled to provide loans for certain sectors which are mostly stressed.
- 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
- They lead to banks having lesser capital to deploy, shareholders losing money and banks finding it tough to survive in the market.
- In light of attaining the Bessel norms, the burden on maintaining Capital Adequacy Ratio increases as their loans have failed to yield results.
- It also affects the competitive position of banks.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- B-Bank Board Bureau
- F-Framework of Accountability
- G-Governance Reforms
- 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.
- 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.
- 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.