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India’s looming Non-Performing Assets problem

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A Non-Performing Asset,  or an NPA, is a loan for which the payment of interest is overdue for over 90 days. All banks around India are obligated to classify these NPAs into Substandard Assets, Doubtful Assets, and Loss Assets.

A Substandard Asset is due for a period less than or equal to a year. A doubtful Asset is in the substandard region for 12 months and a Loss Asset is one which is uncollectable and is of low value.

There are various reasons for the rise of NPAs. Some include the slowdown in the global economy and the irrational lending of banks to business houses. India as a whole has seen a major problem in this field over the recent period

The NPA problem in India

The financial stability of India’s public banks has seen a major downfall since 2011. Gross NPAs had risen to a total of 9.5% in 2015-16. Most of the loans were given out during the peak period of 2004-2008. The banks continued to be inspired by this peak period and continued to irrationally loan out money to various business houses around the country. 

As a global crisis grew, the damage was too much, the projects were unviable, and losses began to surface. The biggest problem faced by the Indian banking system is the fact that the borrower lacks incentives to repay these loans. The business houses are not obliged to make sacrifices either if they decide to default. This led to a huge NPA problem in the Indian Public sector banks

How can India overcome the NPA issue?

India’s NPA problem is on a  rise, and steps must be taken as quickly as possible to resolve these issues to let the banks focus on lending. A new bankruptcy code can play a huge part in helping this system but it will take a lot of time to bring it into full effect.

The second RBI scheme is the Scheme for Sustainable Structuring of Stressed Assets (S4A), under which the bank can offer existing management an opportunity to rehabilitate the project by dividing the debt into two parts. 

The Indian Public Bank sectors need to work on this looming NPA problem. The quicker this is done, the easier it will be for all banks to resume the process of lending money to the business houses which will inevitably help improve the economic condition of the Indian business market

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