As a result, the Indian banking system has seen increase in NPAs and restructured accounts during therecent years.Therefore, there is a need to ensure that the banking system recognises financial distress early, takes prompt steps to resolve it, and ensures fair recovery for lenders and investors.
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 offer restructuring option to corporates.NPA ‘ A classification used by financial institutions that refer to loans that are in jeopardy of default.Once the borrower has failed to make interest or principal payments for 90 days the loan is considered to be a non-performing asset.Also, banks need to evolve strategy through which defaulters are kept out of system unless they honour the previous payment. If the status of NPAs in banks is not controlled, banks can become bankrupt.It is obvious that credit bureaus have failed to obtain this objective as their reports giving credit history of corporate have been inadequate in capturing repeated defaults by same borrower. Public Sector banks provide around 80% of the credit to industries and it is this part of the credit distribution that forms a great chunk of NPA. The economic policy of the government and also politician-corporate nexus is behind the current state of banking industry. If the NPAs keep rising in the current state like that of Kotak Mahindra or Union Bank, it will lead to shutting down of bank and it can also create a very serious economic crisis in the nation. One of the main reasons of rising NPA is the relaxed lending norms especially for corporate honchos when their financial status and credit rating is not analyzed properly. The entire credit distribution structure of the economy can be destructed and the country could be in a major financial turmoil. When US hit the subprime crisis, it was because of the lenient lending norms and baks had huge number of loan defaulters. RBI suggested that lenders should carry out their independent and objective credit appraisal in all cases and must not depend on credit appraisal reports prepared by outside consultants, especially the in-house consultants of the borrower company. Banks/lenders should also carry out sensitivity tests/scenario analysis, especially for infrastructure projects, which should inter alia include project delays and cost overruns.This analysis clearly points out that banks’ approach towards NPAs has been a reason for aggravation of bad loans.Coming to the contribution of credit assessment process, banks need to be more conservative in granting loans to sectors that have been traditionally found to be contributors of NPAs.While the private banks were a bit circumspect in lending to the troubled sector, PSU banks went all out.Not denying the fact that lending practices at PSU banks are fraught with corruption.Also, banks, especially PSUs, should adopt a more rational approach and not lend to the sector carelessly. Ordinary borrowers often complain about difficulty in getting loans, while some large borrowers just get it very comfortably.As they say banks lend money to those who already have enough of it . 😀 Non-performing assets (NPAs) of the banks, especially public sector banks (PSBs), have been going up sharply recently.