Enumerate the major factors behind accumulation of non-performing assets in the Indian banking sector in recent years. (15 marks)


  • Introduce with NPAs
  • Explain various factors causing NPAs – for better presentation, categorize them under subheadings, say banking and non-banking factors
  • Conclude with way forward like IBC implementation, PSB reforms, bond market etc.

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Model Answer :

A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days. The higher is the amount of non-performing assets (NPAs), the weaker will be the bank’s revenue stream.

The Financial Stability Report, 2017, released by the RBI, states that India’s gross NPAs stands at 9.6%. This figure is the sum total of all stressed assets held by lending institutions in the country including co-operatives and small banks in addition to government and private banks. India has the second highest ratio of NPAs among the major economies of the world.


Factors behind accumulation of NPAs in the Indian banking sector in recent years:

Non-Banking Factors

  1. Various factors slowing economic growth: The profits of most of the corporates dwindled due to slowdown in GDP growth, the ban in mining projects, and delay in environmental clearances affecting power, iron and steel sector etc. This has affected their ability to pay back loans and is the most important reason behind increase in NPAs of public sector banks.
  2. Wilful defaults: Indian banks have reported wilful defaults of over 1 lakh crore rupees involving more than 9,000 borrowers who have the capacity to pay up but refused to repay loans.
  3. Global economic slowdown: Continuing uncertainty in the global markets has lead to lower exports of various products, which hurt the corporate sector and its ability to repay loans.
  4. Bond market not deep enough: The bond market in India is not deep enough resulting in corporate having to borrow from banks than from the markets resulting in stress on banks.

Banking related factors

  1. Relaxed lending norms especially for corporate honchos, often due to political pressures and corruption, when their financial status and credit rating is not analyzed properly. Also, in the face of competition, banks gave away unsecured loans.
  2. Lack of rigour in loan appraisal systems and monitoring of warning signals at state-run banks, especially in the case of long-term infrastructure projects.
  3. The wait and watch approach of banks have been often blamed as the reason for rising NPAs as banks allow deteriorating asset class to go from bad to worse in the hope of revival and often offered restructuring option to corporates.
  4. Priority Sector Lending: Some of the NPAs are also found in priority sector, where banks have to give a percentage of their loans to certain sections of society, like farmers, SCs, STs, IT parks, MSMEs etc. But they are much lower than in non-priority sector.

Way forward

Various steps have been taken to tackle the issue of NPAs. Insolvency and Bankruptcy Code (IBC) has become a powerful tool for the banks to recover NPAs and has seen some good early success and it should be maintained. The recent Recapitalisation of PSBs has eased the stress on the banks. Consolidation of the PSBs along with privatisation of some, reforming the governance of PSBs in light of PJ Nayak committee’s recommendation, deepening the bond market etc. must be done so that we do not repeat the mistakes again.

Subjects : Economy