What do you mean by Non-performing asset (NPA). Enumerate the major factors behind accumulation of non-performing assets in the Indian banking sector in recent years.


  • Introduce with NPAs
  • Explain various factors causing NPAs.
  • Suggest way forward to deal with NPA

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.

In its Financial Stability Report for July 2020, the RBI highlighted that the gross NPA ratio fell from 9.3 percent in September 2019 to 8.5 percent by March 2020. However, the central bank said the GNPA ratio of the country’s scheduled commercial banks (SCBs) may increase from 8.5 % in March 2020 to 12.5 %by the same period next year, under the baseline scenario.

Factors Behind Accumulation of NPAs In the Indian Banking Sector in Recent Years:

  1. Historical Reason: The historical origins can be traced to the nationalization of banks in 1969. It opened a window for bank lending on political behest, patronage, and rent-seeking.
  2. Public sector banks themselves are also responsible: Their lending was and is sometimes inept and sometimes corrupt. For one, banks simply did not have the capabilities to assess credit risk in investment lending. For another, banks were caught in a maturity mismatch, because they borrowed short from depositors but had to lend long to investors. The other reasons for rising NPAs are: Weakening of credit underwriting criteria, debt restructuring, poor governance of PSBs etc.
  3. Credit Boom: Part of the reason lies in the extraordinary credit boom that the country witnessed since 2003-04. Credit expansion was phenomenal, with average annual growth rate at 18.69 % while nominal GDP growth rates were 12.62. Credit booms are generally succeeded by stress in the banking system.
  4. Slowing Economic Growth and Global Crisis: The profits of most of the corporates dwindled due to slowdown in GDP growth due to covid, impact of Court judgments on mining, power and steel sectors, delay in environmental clearances, and slump in global trade. This has affected their ability to pay back loans and is the most important reason behind increase in NPAs of public sector banks.
  5. 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.
  6. Willful Defaults: Recently there have also been frauds of high magnitude that have contributed to rising NPAs. As of December 2018, over 11,000 companies had willfully defaulted on amounts worth over Rs 1.61 lakh crore.

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. Steps have been taken to expedite and enable efficient resolution of NPAs of PSBs through Mission Indradhanush, Project Sashakt, consolidation of banks etc. Yet, corrective action is possible and necessary such as:

  1. PSB Governance: The entire process of improving the governance in PSBs, already set in motion, needs to be hastened. The recently constituted Bank Board Bureau is a step in this direction, but its independence from govt influence cannot be assumed. Its autonomy will have to be established.
  2. Credit Risk Management: Proper credit appraisal of the project, creditworthiness of clients and their skill and experience should be carried out. It is essential that public sector commercial banks acquire the capabilities to assess credit risk in investment lending. The establishment of a National Development Bank with a mandate for, and expertise in, longer-term investment lending would also serve a valuable purpose. Effective Management Information System (MIS) needs to be implemented to monitor early warning signals about the projects.
  3. Stricter NPA Recovery: The government needs to amend the laws and give more powers to banks to recover NPAs.
  4. Asset Reconstruction Company: There’s a need to set up an ARC or an Asset Management Company to fast track resolution of stressed assets of PSBs.
  5. Sector-specific Intervention: Power, Steel etc are few sectors that has high NPAs, which could reduce with regulatory clearances, better growth and recovery. To reduce the quantum of NPAs in steel, power and shipping sectors, select successful PSUs should take over the management of stressed projects in their respective sectors, in coordination with the lender banks.