NPA resolution: a rough road ahead: 

NPA resolution: a rough road ahead


  • The problem of NPAs in the Indian banking system is one of the foremost and the most formidable problems that had impact the entire banking system
  •   And banking clean-up plus corporate deleveraging are critical for a more robust economic revival

The Worrying Factor

  •  The latest “Financial Stability Report”, released by the Reserve Bank of India (RBI) states that conditions in the Indian financial system are expected to deteriorate further before they improve.

Indicators of Worsening Situation

  •   Gross non-performing assets (NPAs) rose from 9.2% in September 2016 to 9.6% in March 2017.
  •   Stress tests conducted by the Indian central bank indicate that this number could rise to 10.2% under the baseline scenario
  •  The indicator of banking stability worsened over the second half of fiscal year 2017—with measures of asset quality and profitability providing the most cause for concern
  •  There has been a modest improvement in capital adequacy but this was brought in by the private sector and foreign banks.
  •  The situation in public sector banks is especially worrisome. Capital adequacy is under strain.
  •   Return on assets is negative. So is return on equity.
  • More than a quarter of the loans given by public sector banks to industry (thus excluding loans to agriculture, services and retail consumers) are under stress.
  • In a nutshell, it can be said that government banks are at the epicentre of the larger banking mess.

Implications of “Financial Stability Report”

  • Fifty-six per cent of the loans given out by Indian banks have gone to large borrowers—but they account for a massive 86% of gross NPAs
  •  In that sense, the new strategy of focusing on large defaulters makes good strategic sense.
  •  Bad loans are concentrated in a few firms in a few sectors such as telecommunications, power, infrastructure and steel.
  • All this is a good backdrop at a time when the NPA resolution process has reached a critical stage.

Way Forward

  •  The financial authorities are focusing on a few large problem accounts that are weighing down the Indian banking system.
  •  The RBI has already identified 12 big accounts for quick resolution, under the powers given to it by the recent presidential ordinance
  • These 12 accounts are the source of a full quarter of the total NPAs of the banking system.
  • Lenders have been instructed by their regulator to use the provisions of the new Insolvency and Bankruptcy Code to file insolvency proceedings against companies. Lenders have approached the National Company Law Tribunal in at least two of the 12 accounts identified by the RBI.

Future Prospects

  • The current situation has lead to a track where for the first time, in recent Indian financial history; powerful firms are living under the threat of liquidation.
  •  The new bankruptcy law allows defaulters 270 days to come up with a credible plan to repay loans—and lenders can initiate liquidation if companies fail to do so.
  •  In other words, the design of the bankruptcy code, does not allow the companies to manipulate
  • Any banking clean-up will eventually require capital—lots of capital. it will need external equity capital of unto Rs95,000 crore, far higher than what the government has budgeted as capital infusion for all the banks it owns. So any move made towards dodging the situation will come under the radar of scrutiny.
  • It is also being expected that the Indian investment cycle will improve


  •   It is well known that the economic recovery cannot build momentum unless private sector investment revives.
  •   Such a revival will be very difficult unless the twin balance-sheet problem—over-leveraged corporations and undercapitalized banks—is solved credibly.
  •  The recent move to take large defaulters towards insolvency proceedings shows that some firm action is finally being taken and it definitely shows some hope.
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