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Improvement in GNPA Ratio

Context:

The Reserve Bank of India’s recent report reveals a noteworthy reduction in the gross non-performing asset (GNPA) ratio for Scheduled Commercial Banks (SCBs). The ratio, which stood at 3.9% at the end of March 2023, experienced a significant decline, reaching 3.2% by the end of September 2023. This positive shift can be attributed to key contributing factors, including strategic write-offs, successful upgrades of previously non-performing assets, and effective recoveries.

Relevance:

GS III: Indian Economy

Dimensions of the Article:

  1. Understanding Non-Performing Assets (NPAs)
  2. Understanding Financial Actions Regarding NPAs
  3. Provisions to Address NPAs in India

Understanding Non-Performing Assets (NPAs)

  • According to the Reserve Bank of India (RBI), an asset is classified as non-performing when it stops generating income for the bank.
  • Typically, NPAs are loans or advances where principal or interest payments have been overdue for a specific period.
Criteria for Classification:
  • Debt is commonly labeled as non-performing when loan payments remain unpaid for a minimum of 90 days.
  • In agriculture, if principal and interest are unpaid for two cropping seasons, the loan is deemed an NPA.
Types of NPAs:
  • Sub-standard Assets:
    • NPAs for a period less than or equal to 12 months.
  • Doubtful Assets:
    • NPAs existing for more than 12 months.
  • Loss Assets:
    • Uncollectible assets with little to no hope of recovery, requiring full write-off.
Gross NPA (GNPA) and Net NPA:
  • GNPA:
    • Total amount of NPAs without deducting the provisional amount.
  • Net NPA:
    • Gross NPA minus the provision.
    • Provision represents funds set aside by banks to cover potential losses from bad loans or NPAs.

Understanding Financial Actions Regarding NPAs:

Write-offs:
  • Definition:
    • Write-offs involve the removal of a non-performing loan or asset from the bank’s records, recognizing the unlikelihood of debt recovery.
  • Implication:
    • This action doesn’t relieve the borrower of repayment obligations but acknowledges the challenging prospect of recovery.
Upgrades:
  • Definition:
    • Upgrades signify the reclassification of a loan account from Non-Performing Asset (NPA) status back to a “standard” asset category.
  • Conditions for Upgrades:
    • Typically occurs when arrears of interest and principal are paid by the borrower.
Recoveries:
  • Definition:
    • Recoveries denote funds or assets regained by the bank through various actions aimed at collecting on defaulted loans or NPAs.
  • Recovery Mechanisms:
    • Include repayments, collateral liquidation, or settlements achieved through pursuing effective recovery strategies.

Provisions to Address NPAs in India:

Recovery of Debts due to Banks and Financial Institutions Act (RDB Act), 1993:
  • Established Debt Recovery Tribunals (DRTs) and Debts Recovery Appellate Tribunals (DRATs).
  • Aims to facilitate swift adjudication and recovery of debts owed to banks and financial institutions.
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), 2002:
  • Empowers banks and financial institutions to seize and sell secured assets of defaulting borrowers without requiring court intervention.
  • Enhances the efficiency of the debt recovery process.
Insolvency and Bankruptcy Code (IBC), 2016:
  • Provides a streamlined corporate insolvency resolution process for stressed assets, including NPAs.
  • Facilitates a time-bound and effective mechanism for the resolution of insolvency cases.
Impact of IBC:
  • Since its inception, the Insolvency and Bankruptcy Code has successfully resolved Rs 3.16 lakh crore of debt in 808 cases.
  • Demonstrates the effectiveness of IBC in addressing and mitigating the impact of non-performing assets on the financial sector.

Source: Indian Express


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