The Reserve Bank of India on last Monday ie September 23 put restrictions on Punjab and Maharashtra Cooperative Bank (PMC Bank) primarily due to its gross underreporting of bad loans commonly known as non-performing assets (NPA’s). According to its directions, depositors will be allowed to withdraw a sum not exceeding Rs 1,000 (per day) for the next six months. The bank has also been barred from granting or renewing any loans and advances, make any investment, incur any liability like the acceptance of fresh deposits. It will thus be an understatement to say that NPA’s play a crucial role in the profitable functioning of the banking operations. The focus of today’s article is therefore all about these dreaded non-performing assets.
What are Non-performing assets??
A non-performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days. For example let’s assume XYZ bank lent Rs 10,00,000 to ABC company, which must repay the loan in monthly instalments of Rs 25,000. ABC makes payments on the loan for two years, then encounters cash flow problems and stops making the payments. Three months go by without a payment from ABC company. At this point, XYZ bank has a non-performing loan. The longer ABC company goes without making a payment, the less likely it is that XYZ bank will ever get its money back. The point to be noted here is that loans don’t go bad right away. Most banks allow customers a certain grace period (typically starting at 90 days of non-payment). Then they are marked overdue and the loan is classified as a non-performing loan.
Why it matters!
In short the higher the amount of non-performing assets, the weaker the bank’s revenue stream. In the short-term, many banks have the ability to ride out an increase in non-performing assets. They might have strong reserves or other capital that can be used to offset the losses. But after a while, if that capital is used up, non-performing loans will imperil a bank’s health. Think of non-performing assets as dead weight on the balance sheet.
Sub-Classifications for Non-Performing Assets (NPAs)
Banks need to establish sub-classifications for non-performing assets. The four additional categories they typically use include:
1. Standard Assets: They are NPAs that have been past due for anywhere from 90 days to 12 months, with a normal risk level.
2. Sub-Standard Assets: They are NPAs that have been past due for more than 12 months. They have a significantly higher risk level, combined with a borrower that has less than ideal credit worthiness.
3. Doubtful Debts: Non-performing assets in the doubtful debts’ category have been past due for at least 18 months. Banks generally have serious doubts that the borrower will ever repay the full advance. This class of NPA affects the way the bank looks and how liquid it is.
4. Loss Assets: They are non-performing assets with an extended period of non-payment. With this class, banks are forced to accept that the loan will never be repaid, and they will be forced to take a loss, which must be reported on their balance sheet. The entire amount of the loan must be written off completely.
According to the Reserve Bank of India (RBI), the gross non-performing assets in Indian banks, specifically in public sector banks, are valued at around Rs 400,000 crore, which represents 90% of the total NPA in India, with private sector banks accounting for the remainder. The main reason behind this growing number in NPA’s is the relaxed lending norms adopted by banks, especially to the big corporate houses, foregoing analysis of their financials and their credit ratings.
Every time a bank goes down or is flagged with embargos by the RBI, the ordinary depositors who have invested their lifelong savings with such banks face the brunt. Adding to it the defaulters flee the country before getting caught thereby rubbing salt on injury. Although the RBI has taken steps to tackle the menace of NPA’s with measures such as tightening credit monitoring, placing corporate governance framework etc. Such measures are clearly falling short of deterring the defaulters and the erring credit managers. We need a Laws where serious economic offences are treated at par with terrorism and dealt with swift and harsh punishment. If we harness dreams to become an economic superpower in the eyes of the world, there shouldn’t be any scope for financial impropriety within our own boundaries as it shakes the trust and brings a sense to insecurity all around. As they say the most expensive thing in the world is Trust it can take years to earn, and just a matter of seconds to lose.
