PSU Banks Are Trying To Overcome The NPA Trap

Updated: Monday, August 29, 2016, 13:21 [IST]

When stepping to seek an opportunity in the Financial World, the key aspect to focus is the NPA which highlights the potential growth in the banking sector. Now the question arises as to what do you mean NPA?

PSU Banks Are Trying To Overcome The NPA Trap

NPA (Non Performing Asset) is a credit facility in the financial market whereby the interest or installment or both of principal remains PAST DUE for a given period of time. In other words, an asset is termed as NPA when it ceases to produce income for the lender.

In most cases, debt is classified as nonperforming when loan payments have not been made for a period of 90 days.

Let us now dig into the reasons as to what lead to this vicious cycle of rising NPA in the banking sector.

Internal factors:

1. Funds borrowed for a particular purpose but not use for stated purpose.

2. Project not completed in stipulated time.

3. Poor recovery of account receivables.

4. Excess capacities created on costs not related to the economy.

5. Inability of the firms to raise capital for growth through the issue of equity or other debt instruments from financial markets.

6. Business failures.

7. Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister concerns.

8. Willful defaults, siphoning of funds, fraud, disputes, management disputes, misappropriation etc.

9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring, and follow-ups, delay in settlement of payments\ subsidiaries by government bodies etc.

External factors:

1. Sluggish legal system

• Long legal tangles

• Changes that had taken place in labor laws

• Lack of sincere effort.

2. Scarcity of raw materials, power and other resources due to recession, natural calamity and any abnormal circumstances.

3. Failures reflected in rest of the world in terms of recession, external problem, adverse exchange and many more.

4. Government policies like duty changes.

2010 onwards, India witnessed a sharp rise in its key interest rate which doubles from 4% to 8.25%. This step was taken by the Government in an attempt to curb the growing inflation in the country.

However, this did not have a favorable impact on the overall economy. As a direct consequence of the increase in the repo rates, the banks raised their lending rates so as to pass on the cost to the customers.

This is in turn has affected the banks adversely because the existing customers started defaulting on their loans. Also, the banks were unable to allure new customers. This chain led to the creation of Non Performing Assets.
This problem kept aggravating as the cycle continued.

NPAs are viewed as a negative sign in the banker's books of accounts which consequently had an adverse impact on the economy. Bad loans or Default in financial parlance highlights redirection of funds from good to bad ones. As the banks failed to recover the funds they had lent out, the banks were unable to make profits and a liquidity crisis broke out. This had a profound impact on the shareholders as it adversely affected their wealth.

Once again post 2013 interest rate began to fall and by 2015 RBI governor Rajan initiated the NPA clean up through scaling down interest to now 6.5% and creating provision after reviewing the possible bad loans instead of categorizing them as NPA.

India as earlier designated to be an emerging economy; this rate cut would help its Banking Sector to grow as this expects the NPA to fall whereby increasing the profitability. In case if we see a phenomenal growth in NPA of individual banks then it should be looked up as a matter of concern.

The article is written by Palak Gupta

(Disclaimer: The contents of the article is sourced from the research report of Dynamic Levels with due permission. Dynamic Levels is a website owned by Dynamic Equities Pvt Limited, a member of BSE and NSE. You can visit Dynamic Levels by clicking: Dynamic Levels The article is not a solicitation to buy, sell in securities or other financial instruments. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and Dynamic Levels do not accept culpability for losses and/or damages arising based on information in this article.)