Banks’ Gross NPAs Drop to 3.2% | 01 Jan 2024

Source: IE

Why in News?

The gross non-performing asset (GNPA) ratio for Scheduled commercial banks (SCBs) witnessed a significant decline, falling from 3.9% at the end of March 2023 to 3.2% by the end of September, 2023, as per the recent report of Reserve Bank of India (RBI).

  • Contributing factors: Write-offs, Upgrades, and Recoveries.

What is a Non-Performing Asset?

  • About:
    • As per RBI, an asset becomes non-performing when it ceases to generate income for the bank.
    • NPA is usually a loan or advance for which the principal or interest payment remained overdue for a certain period of time.
      • In most cases, debt is classified as non-performing, when the loan payments have not been made for a minimum period of 90 days.
      • For agriculture, if principle and interest is not paid for 2 cropping seasons, the loan is classified as NPA.
  • Types:
    • Banks are required to classify NPAs further into the following three categories based on the period for which the asset has remained non-performing and the realizability of the dues:
      • Sub-standard Assets: A substandard asset is an asset classified as an NPA for a period less than or equal to 12 months.
      • Doubtful Assets: A doubtful asset is an asset that has been non performing for a period exceeding 12 months.
      • Loss Assets: Assets that are uncollectible and where there is little, or no hope of recovery and that needs to be fully written off.
  • Gross NPA(GNPA) and Net NPA:
    • GNPA: This is the total amount of NPAs without deducting the provisional amount.
    • Net NPA: This is the gross NPA minus the provision.
      • Provision refers to funds left aside by banks to cover potential losses arising from bad loans or NPAs.
  • Provisions to Deal with NPAs in India:
    • The Recovery of Debts due to Banks and Financial Institutions Act (RDB Act), 1993: It established Debt Recovery Tribunals (DRTs) and Debts Recovery Appellate Tribunals (DRATs) to quickly adjudicate and recover debts owed to banks and financial institutions.
    • The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), 2002: Empowers banks and financial institutions to take possession and sell secured assets of defaulting borrowers without court intervention.
    • The Insolvency and Bankruptcy Code (IBC), 2016: Provides a fast-track corporate insolvency resolution process for stressed assets, including NPAs.
      • IBC has helped resolve Rs 3.16 lakh crore of debt stuck in 808 cases, since its inception.
  • Write-offs: Write-offs refer to the removal of a non-performing loan or asset from the bank's books as an acknowledgment that the debt is unlikely to be recovered.
    • This action does not absolve the borrower from the obligation to repay but acknowledges the unlikelihood of recovery.
  • Upgrades: It refers to the process of reclassifying a loan account from NPA back to a "standard" asset category, if certain conditions are satisfied including: arrears of interest and principal are paid by the borrower.
  • Recoveries: Recoveries represent the funds or assets regained by the bank after taking actions to collect on defaulted loans or NPAs.
    • These can include repayments, collateral liquidation, or settlements after pursuing recovery mechanisms.

UPSC Civil Services Examination, Previous Year Question (PYQ)

Prelims

Q. Which of the following statements best describes the term ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’, recently seen in the news? (2017)

(a) It is a procedure for considering ecological costs of developmental schemes formulated by the Government.

(b) It is a scheme of RBI for reworking the financial structure of big corporate entities facing genuine difficulties.

(c) It is a disinvestment plan of the Government regarding Central Public Sector Undertakings.

(d) It is an important provision in ‘The Insolvency and Bankruptcy Code’ recently implemented by the Government.

Ans: (b)