Non-performing assets

• According to RBI data, the mega write-off exercise has enabled banks to reduce their non-performing assets (NPAs) or defaulted loans by Rs 10,09,510 crore ($123.86 billion) over the last five years.
• However, banks have only been able to recover 13% of it so far.

Concerning the news

• This massive write-off would have been enough to cover 61% of India's projected gross fiscal deficit of Rs 16.61 lakh crore in 2022-23.
• As of March 2022, the banking sector reported a decrease in gross NPAs to Rs 7, 29,388 crores, or 5.9 percent of total advances.
• In 2017-18, gross NPAs were 11.2 percent.
• When a bank writes off a loan, it removes it from the bank's asset book.
• When a borrower fails to make loan payments and there is little chance of recovery, the bank writes off the loan.
• The lender then removes the defaulted loan, or NPA, from the assets side of the ledger and records the amount as a loss.
• Public sector banks reported the highest number of write-offs at Rs 734,738 crore, accounting for nearly 73% of the total.

What exactly is NPA?

• When a loan's principal or interest payment is 90 days late, it becomes an NPA.

NPA Varieties

• Sub Standard: A sub-standard asset is one that has been classified as a non-performing asset for a period of less than twelve months.
• Doubtful: A doubtful asset is one that has remained an NPA for more than a year.
• A loss asset is one that has already been identified by the bank or an external institution as a loss, but it has not yet been completely written off due to its recovery value, however small.

What causes banks to write off loans?

• When a loan goes bad, a bank writes it off when the chances of recovery are slim.
• It assists the bank in reducing not only its NPAs but also its taxes because the written-off amount can be deducted from profit before tax.
• Following a write-off, banks are expected to continue their efforts to recover the loan through a variety of means. They must also make provisions.

Reasons for Banking NPA

The economic downturn

• Prior to the 2008 financial crisis, India's economy was booming.
• During this time, banks extended large amounts of credit to corporations in the hope that the good times would continue in the future.

Earnings of corporations

• Their ability to repay loans was hampered by low earnings. This is one of the primary reasons for the rise in NPAs at public sector banks.

Lending standards have been relaxed.

• Another major contributor to rising NPAs was the loosening of corporate lending standards.
• Their financial situation and credit rating were not thoroughly examined.

Banks in the public sector

• It provides a large portion of credit to industries, and it is this portion of credit distribution that accounts for a large portion of NPA.

The sector of priority sector lending (PSL)

• This has significantly contributed to the NPAs. Agriculture, education, housing, and MSMEs are among the priority sectors.

Promoters' credit default

• There have also been cases of promoters defaulting on credit, where funds were diverted by over-invoicing imports, sourcing through a promoter-owned subsidiary abroad, or exporting to shell companies and then declaring that they defaulted.

Problems with NPA

Provisioning

• Bad loans force banks to set aside a portion of their operating revenue to account for bad loans, a process known as provisioning.
• Capital Adequacy Ratio (CAR) or Capital to Risk (weighted) Assets Ratio are technical terms for provisioning (CRAR).

Profitability is lower.

• Banks are required to make bad loan provisions from their operating income.
• The bank in question becomes less profitable as a result of having to use some of its profits from other loans to offset the loss on the bad loans.

Risk-averse

• Officials at such banks are hesitant to extend loans to potentially risky business ventures for fear of exacerbating an already high level of non-performing assets (or NPAs).

The stock market is in decline.

• Any decrease in the perceived valuation of banks may result in a loss of share value, resulting in a general decline in the share markets. This could wipe out shareholders' wealth in the financial markets.

Increasing Bad Loans

• Despite various efforts, a significant amount of NPAs remain on bank balance sheets, owing to the fact that the stock of bad loans revealed by the Asset Quality Review is not only large, but also fragmented across various lenders.

The way forward

• NPAs are written off on a regular basis by banks in order to clean up their balance sheets.
• Its primary goal is to clean up the balance sheet and improve tax efficiency.
• Loans are written off from the books at the Head Office in Technically Written Off accounts, but the right to recover is not waived.

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