Indian Banking Sector: The NPA problem

Mon, Feb 29, 2016

In Focus

Banks are the backbone of any economy. Banks play a vital role in economic development and provide financial resources to an individual, corporation, government or a sector in need. The health of any economy is directly related to the financial status of its banks.

India is a developing nation and is growing at commendable rate as compared to other economies. Though India has a respectable position in terms of financial stability at the global level, still its banks are suffering from the menace of ever increasing Non Performing Assets i.e. NPA.

Technically NPAs are loans in which borrower has not paid neither interest nor principal for at least ninety days. In India Public sector banks are more highly affected due to NPA. They have to render loans to borrowers in order to facilitate economic development agenda of the government. This results in wilful defaulters who try to delay the repayment as long as they can by misusing the provisions of law in their favour.

NPAs have repercussions on the bank’s financial statements. Moreover a weak banking system reduces the investor’s confidence on the Indian market. Depositors do not get proper returns and in extreme scenarios can also lose their uninsured deposits. We should not forget the 2008 financial crisis which triggered mainly due to bankruptcy of some financial institutions in the USA. This also leads to liquidity problems in the market.

Banks have to be slightly more conscious and strict while lending loans. They should focus on selection of right borrowers and their ability for timely payments, so as to minimize the chances of new NPAs. The policy makers and the regulators should be in line to assist banks in getting rid of NPAs. The proposed Bankruptcy code will shorten the timelines for resolution and recovery in case of insolvency. It’s true that banks can’t get rid of NPAs in an overnight. It is a gradual process. However, dedicated commitment by the banks, RBI, and government will definitely clean up their balance sheets.

By: Arpit Jain

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