INDIA’S GNPA RATIO DECREASES: RBI

The Reserve Bank of India’s (RBI) annual Trend and Progress of Banking in India report for the financial year 2022-23 revealed a decrease in the Gross Non-Performing Assets ( ) ratio to 3.9 per cent in 2022-23.

1. The Gross Non-Performing Asset (GNPA) ratio is calculated by dividing the total gross NPAs by the total assets. A high GNPA ratio can indicate that a bank has a large number of loans that are not being repaid.

About NPA

1. Non-Performing Assets (NPA) is a loan or advance that is overdue for interest or principal installments for a period of 90 days. 
2. According to the RBI, an asset becomes non-performing when it stops generating income for the bank.

Reasons for NPAs

1. Defective Lending Process: Improper selection and infrequent review of borrowers' credit profiles in Public Sector Banks (PSBs) can lead to NPAs.

• Lack of cooperation with financial institutions can result in borrowers defaulting in multiple banks.

2. Willful Defaults: Some borrowers, despite having the means to repay their loans, choose not to pay which result in loan defaults.
3. Industrial Sickness: Ineffective management, resource inadequacy (deficiency), technological changes, and government policy shifts contribute to industrial sickness, impacting banks financing these industries.
4. Regulatory Issues: Flouting (defying) RBI guidelines and non-compliance with regulatory directives by PSBs can lead to frauds and NPA escalation (rise).
5. Frauds by Bankers and Borrowers: Instances of fraud in the public sector banking system are increasing, though still relatively small compared to overall NPAs.

• Reported fraud cases in the banking sector surged above 14,000 in the first half of the 2023-24 financial year, up from 5,400 cases in the same period last year (2022-23).

Major steps taken to reduce NPA

1. SARFAESI Act ,2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002): It allows secured creditors to take possession of collateral, against which a loan had been provided, upon a default in repayment.
2. Debt Recovery Tribunals: Established under the Recovery of Debts and Bankruptcy Act, 1993.
3. Insolvency and Bankruptcy Code (IBC), 2016: For reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner i.e. within 180 days or the extended period of 90 days.
4. National Asset Reconstruction Company (NARCL): It aims to reduce NPAs of banks, improving financial system stability and efficiency.

• It is incorporated under the Companies Act 2013 with PSBs holding a majority stake.

5. Indradhanush plan for revamping PSBs, envisaging infusion of capital in PSBs.

Other Highlights of Report

1. Consolidated balance sheet of Scheduled Commercial Banks grew by 12% in 2022-23, the highest in 9 years.
2. Urban Co-operative Banks (UCBs) saw above 2% expansion in their combined balance sheets, while Non-Banking Financial Companies (NBFCs) witnessed a 15% growth.
3. Unsecured retail segment's growth rate surpassed total bank credit growth. NBFCs' double-digit credit expansion was fuelled by unsecured loans, growing more than twice as fast as secured loans.
4. Total reported bank fraud declined to a 6-year low in 2022-23, with the average fraud amount at its lowest in a decade.
5. Capital-to-Risk-Weighted Assets Ratio (CRAR) of SCBs reached 17% by September 2023.

Impact and Solutions:

Impact	Solutions
Rising NPAs hinder banks from lending for productive activities, slowing down economic growth. This can result in reduced job opportunities and inflation.	Government support through a comprehensive 4R strategy - Recognition of NPAs, Resolution of stressed accounts, Recapitalizing PSBs, and financial Reforms.
Rising NPAs may prompt banks to raise interest rates to cover losses, increasing borrowing costs for individuals and companies.	Strengthen credit monitoring by developing early warning mechanisms and comprehensive MIS for timely detection of problem accounts.
Growing NPAs pose reputational, operational, and business risks for banks, eroding customer trust and affecting financial stability.	Enhance the credit approval process for thorough assessments and periodic reviews.
Courts face mounting backlog due to inefficient debt recovery systems, causing delays in resolving cases.	Establish new Development Financial Institutions (DFIs) for long-term project funding.
NPAs weaken banks' capital base, making it challenging to meet regulatory capital adequacy requirements.	Implement risk management to diversify loan portfolios and reduce NPAs during economic downturns.

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