Financial distress: Growing NPAs

Gross NPAs of commercial banks have been on upward trajectory in past two years as the economy has grown at its slowest pace in more than a decade. Loans and advances swelled to Rs.1.79 trillion by the end of December 2012 from Rs.1.32 trillion at the quarter ended in March 2012, and to Rs.2.43 trillion at the end of the December 2013 quarter.  Rs.85 trillion of Indian banking industry is stressed by the consistently increasing Non Performing Assets (NPAs).

Loans and advances provided by banks to its customer for any pre stated activities, say investments, are Assets to the bank. The loan turns as NPA when instalment of principle amount or interest component is not paid for 90 days from the due date. Thus Bad loans are the assets that cease to generate income for the bank.

One can justify this rise in level of NPAs through number of reasons like: 

1.   Lethargic procedure of sanctioning and disbursement of the loan: For instance say, a manufacturing company has outlined the framework to step up new plants by forecasting growth in near future but lethargic documentation for sanctioning and disbursement could take months of time in completion of documentation process which delays the investment, result in slipping the opportunity of generating profit in heydays.
2. Economic slowdown: Investment made by speculators in mega projects during boom phase of 2004–08 are not providing any fruitful results because of global slowdown and pushing borrowers in critical situations where they are not able to repay their dues.
3. Time taken by Government in approval of projects: Due to extensive corruption in government bodies, stringent government policies and most importantly “the willingness of government” was not able to clear suspicion or uncertainty over many projects which could have been resolved easily. Environment clearance is the major hurdle before major projects whose completion is time bound in nature, resulting in defaulter in repayment of their finance. 
4.  Willful defaulters: As per the RBI guidelines, willful defaulters are the ones who defaulted in meeting its repayment of their obligations to the lenders even when it has the capacity to honour such obligation or the ones who defaulted in meeting its repayment of their obligations to the lenders and has not utilized the finance for the specific purpose for which it was availed of but diverted the funds to some other deeds. 
5.  Priority sector lending (PSL): One of the reasons of continuously rising NPAs could be the obligations needs to meet by commercial banks especially public sector banks (PSBs). Sanctioning loans and advances to priority sector result in long list of NPAs. PSL mainly refer to the section of society which do not get sufficient finance on time which primarily comprises of weaker sections of society like farmers and small scale industries mainly due to few reasons mentioned below:

• Lack of Credit Worthiness of the individual/firm to repay the debt
• Lack of collateral security of the individual/firm borrower
• Lack of adequate documents needed to be qualifies to get a loan

Solution and some preventive measure Government and Banks should adopt in order to bring down the sky touching NPAs:

1. Relaxation in rules and regulations: Need to relax stringent rules and speed up the process clearance of projects which result in completion of mega projects in India in a time-bound manner which is an urgent need of hour to bring down NPAs in near future and to achieve the desired economic growth.
2. Regular follow up: RBI had outlined action plan to tackle NPAs which help banks to identify the stressed amount long before it turns into NPAs by creating Special Mention Accounts (SMA). The account should be categorised as SMA 1 if overdue remains for 30 days & SMA 2 if remains overdue more than 30 days to 89 days. This helps in early identification of potential defaulter hence, efforts for recovery of due within the time to be done. Regular follow up and notices should be sent to borrower.
3.  Asset Restructuring Companies (ARCs): ARCs are specialised entities which pick up stressed assets of banks and financial institutions at a discount and make recovery. And aid banks and financial institute to off load bad assets from their books of account and allow them to focus of recovery plans. RBI should encourage establishment of ARCs which facilitate other financial institutes in written off their bad loans from their balance sheet and allow them to focus toward constructive objective

India is a growing economy, hence investments are the need of hour to maintain growth trajectory. And NPAs are modern banking’s Achilles heel with some bad investment or investments toward PSL which cannot be avoided but if certain adequate set of rules and guidelines are formulated and ease some stringent norms
or should lay down measures to encourage ARCs, which encourage investments, will tame this monster and keep NPAs within the limit, would help banks and financial institutes to focus on recovery plans.