II. NPAs (Non-Performing Assets)

What is NPA?

Definition: 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.
Description: Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”
Wilful Defaulters: According to the RBI, a wilful default is deemed to have occurred in any of the following four circumstances:
- When there is a default in repayment obligations by the unit (company/individual) to the lender even when it has the capacity to honour the said obligations. There is deliberate intention of not repaying the loan.
- The funds are not utilised for the specific purpose for which finance was availed but have been diverted for other purposes.
- When the funds have been siphoned off and not been utilised for the purpose for which it was availed. Further, no assets are available which justify the usage of funds.
- When the asset bought by the lenders’ funds have been sold off without the knowledge of the bank/lender.

Impact of NPAs on Taxpayer

There are two effects that the rising tide of bad loans has on the banking system:
First, the taxpayer ends up paying. Banks take money from depositors that they lend to borrowers. If a borrower cannot repay loans banks make up the shortfall from their own capital and profits. If a bank has bad loans, its shareholders take the hit. India's public sector banks are owned by the government and, so these bad loans are a loss to the government and the taxpayer.
Second, bad loans slow economic activity. Banks lend to companies to make profits and grow their working capital. High levels of bad loans erode bank capital, reduce their ability to raise fresh capital and reduce a bank's capacity to lend, slowing the economy.

Measures taken by RBI to counter/resolve NPAs

1. Revitalizing Stressed Assets

Early recognition, and time-bound resolution or liquidation of stressed assets is critical for de-clogging bank balance sheets and for efficient reallocation of capital. The Reserve Bank and the Government of India have been working together to comprehensively address the challenge through a multi-pronged approach. Specific measures are aimed at strengthening the legal, regulatory, supervisory and institutional framework with the ultimate objective of facilitating quick resolution of stressed assets in a time bound manner.

2. Prompt Corrective Measures

Several measures have been put in place for resolution of stressed assets through optimal structuring of credit facilities, the ability to change ownership/management, and greater transparency in the sale of stressed assets. The system of Prompt Corrective Action (PCA) under which specific regulatory actions are taken by the Reserve Bank if banks breach certain trigger points was revised recently. The endeavour is to ensure timely supervisory action by following a rule-based approach. In order to ensure effective supervisory action on serious violations/breaches, a separate Enforcement Department has been established.

3. Asset Reconstruction Companies (ARCs)

At present, there are 24 ARCs in the country, which are regulated and supervised by the Reserve Bank under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002). After an amendment to the SARFAESI Act 2002 carried out in August 2016 through the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, securitisation companies and reconstruction companies will be known as ARCs.

4. The 5/25 Refinancing of Infrastructure Scheme

This scheme offered a larger window for revival of stressed assets in the infrastructure sectors and eight core industry sectors.
Under this scheme lenders were allowed to extend amortisation periods to 25 years with interest rates adjusted every 5 years, so as to match the funding period with the long gestation and productive life of these projects.
The scheme thus aimed to improve the credit profile and liquidity position of borrowers, while allowing banks to treat these loans as standard in their balance sheets, reducing provisioning costs.
However, with amortisation spread out over a longer period, this arrangement also meant that the companies faced a higher interest burden, which they found difficult to repay, forcing banks to extend additional loans (‘ever greening’). This in turn has aggravated the initial problem.

5. Private Asset Reconstruction Companies (ARCs)

ARCs were introduced to India under the SARFAESI Act (2002), with the notion that as specialists in the task of resolving problem loans, they could relieve banks of this burden.
However, ARCs have found it difficult to resolve the assets they have purchased, so they are only willing to purchase loans at low prices. As a result, banks have been unwilling to sell them loans on a large scale.
Then, in 2014 the fee structure of the ARCs was modified, requiring ARCs to pay a greater proportion of the purchase price up-front in cash.
Since then, sales have slowed to a trickle: only about 5 percent of total NPAs at book value were sold over 2014-15 and 2015-16.

6. Strategic Debt Restructuring (SDR)

The RBI came up with the SDR scheme in June 2015 to provide an opportunity to banks to convert debt of companies (whose stressed assets were restructured but which could not finally fulfil the conditions attached to such restructuring) to 51% equity and sell them to the highest bidders, subject to authorization by existing shareholders.
An 18-month period was envisaged for these transactions, during which the loans could be classified as performing.
But as of end-December 2016, only two sales had materialized, in part because many firms remained financially unviable, since only a small portion of their debt had been converted to equity.

7. Asset Quality Review (AQR)

Resolution of the problem of bad assets requires sound recognition of such assets.
Therefore, the RBI emphasized AQR, to verify that banks were assessing loans in line with RBI loan classification rules.
Any deviations from such rules were to be rectified by March 2016.

8. Scheme for Sustainable Structuring of Stressed Assets (S4A)

Under this arrangement, introduced in June 2016, an independent agency hired by the banks will decide on how much of the stressed debt of a company is ‘sustainable’.