Explain the concept of Non-Performing Assets (NPAs) and discuss their impact on the Indian banking system. (Approx. 600 words)

Finance and Management (FM) - Expected Question

Answer:

Introduction:
A Non-Performing Asset (NPA) is a loan or advance for which the principal or interest payment remains overdue for 90 days. High NPAs indicate financial stress in the banking sector, affecting overall economic growth.

Classification of NPAs:

1. Substandard Assets: Non-performing for less than 12 months.
2. Doubtful Assets: Non-performing for more than 12 months.
3. Loss Assets: Identified as uncollectible by banks or auditors.

Causes of Rising NPAs in India:

1. Economic Slowdown: Decline in demand affects businesses, making loan repayments difficult.
2. Poor Credit Appraisal: Lack of due diligence in lending.
3. Corporate Mismanagement: Diversion of funds by borrowers.
4. External Shocks: Events like the COVID-19 pandemic increased stress on loan repayment.

Impact of NPAs on the Banking System:

1. Reduced Profitability: Banks allocate more funds for provisions, affecting their earnings.
2. Lower Credit Growth: Banks become hesitant to lend, slowing economic growth.
3. Increased Borrowing Costs: Higher NPAs force banks to raise interest rates.

Government and RBI Measures to Tackle NPAs:

• Insolvency and Bankruptcy Code (IBC), 2016: A faster mechanism for resolving bad loans.
• Asset Reconstruction Companies (ARCs): Buy stressed assets and help banks clean their balance sheets.
• Bad Bank (NARCL): Created to take over and resolve high-value NPAs.
• Prudential Norms: RBI guidelines for recognizing and provisioning NPAs.

Conclusion:
Managing NPAs is crucial for a strong banking system. A proactive approach, including stricter lending norms, efficient recovery mechanisms, and promoting financial discipline among borrowers, is key to reducing NPAs in India.