Discuss the various reasons behind the rise in NPAs (non-performing assets) in the Indian banking sector and suggest measures to tackle this rise. ![npa essay 250 words](https://www.drishtiias.com/images/uploads/1693312353_thumbnail_contact%20us%20opt1.png)
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What is a bad bank? Can it help create good banks in India? Critically analyse. (250 Words)
Mentors Comment:
The idea of forming a ‘bad bank’ in India was initially floated in 2017 when the Economic Survey suggested setting up a Public Sector Asset Rehabilitation Agency (PARA). Along with it, RBI floated the idea of PAMCs and NAMCs on the lines of Bad Banks. Therefore, it’s an important topic, given the challenge of NPA in our banking sector.
In the intro, discuss the challenges of NPA facing the banking sector in India.
The first part of the answer will discuss the bad bank and its salient features and how it is supposed to work.
Then discuss how it will be beneficial to commercial PSBs and what are the challenges that it will face.
Provide various suggestions that can help for better functioning of bad banks and the banking sector overall. One important thing to remember is that bad bank is not the ultimate step for NPA challenge. It’s one of many steps and preferably the last step in that direction. The most important step that govt needs to take is better regulation, monitoring, and functioning of PSBs, capital infusion and structural reforms in the economy to tackle the NPA problem.
The government of India is planning to set up a Bad Bank to rescue the banking system from the rising non-performing assets. The total stress in the Indian banking system is about Rs. 14 lakh crore, i.e., this is the amount for which loans have been given to industry and for which there is now no certainty of repayment. Public sector banks share a disproportionate burden of this stress.
What is Bad Bank:
- A Bad Bank is an Asset Reconstruction Company (ARC).
- Once it is formed, banks divide their assets into two categories (a) one with non-performing assets and other risky liabilities and (b) others with healthy assets, which help banks grow financially.
- ARC or Bad Bank buys bad loans from the commercial banks at a discount and tries to recover the money from the defaulter by providing a systematic solution over a period of time.
- The bad bank will manage these Non-Performing Assets in suitable ways, some may be liquidated, others may be restructured, etc.
- RBI, too, came up with a suggestion to form two entities to clean up the bad loan problems ailing PSBs -PAMC (Private Asset Management Company) and NAMC (National Assets Management Company).
- PAMC would be formed by roping in banks and global funding companies.
- This would invest in areas where there’s a short-term economic viability.
- NAMC would be formed with government support, which would invest in bad assets with short-term stress but good chances of turnaround and economic benefit.
Benefits of setting up a bad bank
- The major benefit of forming a bad bank is asset monetization. It’s the process of turning a non-revenue-generating item into cash.
- Bad assets would stay in the risky category, while the good one stays in the other category, saving them from mixing together.
- Since 40% of the NPA is concentrated only in 60 firms, so better we create a centralized agency PARA, which will work as a Bad Bank and absorb the losses from the PSBs.
- Since a bad bank specializes in loan recovery, it is expected to perform better than commercial banks, whose expertise lies in lending.
- The recent IBC amendments make it complex for foreign players to take part in resolution.
- Experts believe a vehicle like AMC or ARC that could address the stressed loan issue, till the bankruptcy code stabilizes, could be beneficial.
- A single government entity will be more competent to take decisions rather than 28 individual PSBs.
- Capacity building for a complex workout can be better handled by the government which has regulatory control and has management skill sets in public sector enterprises.
- Foreign investors with both risk capital and risk appetite would be more in a government-led initiative, knowing that regulatory risks would stand considerably mitigated in various stages of resolution, including take-outs.
Challenges with Bad Bank:
- A banking institution has to keep in mind its choices of assets to be transferred into the risky category, business case, portfolio strategy, and the operating model.
- Each of these choices must be made while considering the impact on funding, capital relief, cost, feasibility, profits, and timing.
- The government support is also necessary to help banks understand regulatory and tax-related issues.
- Once the NPA problem is settled, the Bankers may become complacent and again resume reckless lending.
- A one-size-fits-all approach to designing a bad bank can be very expensive and less effective.
- At least Rs. 25,000 to Rs. 30,000 crore of capital will be required to set up a bad bank in the initial stages.
Way Forward:
- Bad Bank should be based on a set criterion as any such exercise creates a moral hazard that should be eschewed.
- There have to be strict performance criteria for the banks selling such assets.
- The criteria for buying assets should be transparent and a pecking order must be drawn up where probably the restructured assets get priority.
- A competitive approach should prevail among the banks so that they work hard to qualify for the sale of bad assets to the bad bank. This, in fact, will ensure better governance standards too.
- Set up a bad bank to deal with NPAs at some of the weaker PSBs, instead of one that picks up NPAs from all PSBs.
- It would prove less controversial if the government had a majority stake in it..
- The government must infuse more capital into the better-performing PSBs.
- It must also create, through an act of Parliament, an apex Loan Resolution Authority for tackling bad loans at PSBs.
The resolution of bad loans and restoring the health of PSBs is among the biggest challenges the economy faces today. It’s a challenge that requires a response on multiple fronts. A bad bank cannot be the sole response. The most efficient approach would be to design solutions tailor-made for different parts of India’s bad loan problem and use Bad Bank only as a last resort once all other methods fail.
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Hi Anmol Decent answer. Good structure. Content is good.
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HI Yogesh Discuss more about the salient features of Bad banks after your intro. The overall direction is decent but the content needs a better explanation and language. Work on it.
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Payment ID: MOJO9802W00A98715356 Please review
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Sir, how do we access AWE monthly magazine?
mail the query to @Civils Daily .com">hello @Civils Daily .com They will guide you
Hi Sahithya Good answer. Your discussion as all the necessary elements. Its structure and flow is also good.
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Hi Balakumaran The intro is a little bit big. Shorten it. The overall content is decent but depth is missing. Give more points in your main body of the answer. Underline imp points.
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Hi Murari Good coverage. The discussion is decent in terms of explanation as well as the crispness of your points. The content is deep and decent.
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Hi Abhigyan Good use of flowchart to explain Para Bank. Overall fine answer. Good structure.
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Part 2: Write an essay of 250 words on the following topic Some people say that news involving teenage suicides should be banned from all social media platforms. Do you agree or disagree with this?
These days, in an era of widespread media and ever-advancing communications technologies, people are kept abreast of events and occurrences all around the globe. In regard to the use of mass media, some people believe that there ought to be a worldwide ban on the broadcast of teenage suicides by dint of potential negative psychological […] Read More Band 8+
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Three Main Types of NPAs: -. Substandard Asset. Doubtful Asset. Loss Asset. Substandard Asset. When a loan remains NPA for 12 months or less, it is called Sub-Standard Asset. In such a loan, the total assets or collateral of the borrower is not so much that the entire dues can be recovered from it. Doubtful Asset.
Essay on NPA in Indian Banks. The loans provided by the banks to the borrowers are known as assets of the bank. In case, if the borrower is not giving the interest or the principal or both the elements of a loan to the bank, then such a loan will be regarded as a Non-Performing Asset (NPA). Therefore, any asset which does not provide any return ...
Essay on NPA or Non-performing Assets is one of the most important essay topics for banking exams as well as other competitive exams. Here we have written essay on npa or essay on non-performing assets which is most important for IBPS PO Mains Exam descriptive paper, SBI PO Mains Descriptive Paper and other banking exams. Lets see essay on NPA.
Long Essay on NPA 500 Words in English. Long Essay on NPA is usually given to classes 7, 8, 9, and 10. NPA is the abbreviated form of Non-Performing Assets. NPA is a very well known term in commercial fields. The lists of non-performing assets are found on a bank or any other financial institution's balance sheet.
The rise in NPAs not only affects the banking sector but also poses a threat to the growing economy. The slowdown in the economy due to the piling of NPAs affects businesses in all sectors by curbing investments which in turn has an adverse impact on the economy and stock markets. While the NPA crisis in the banking sector began in the early ...
Full Essay Link: https://www.indianconstitutions.com/essay-on-npa-in-indian-banks/Like & SubscribeSolved Queries:indian economy,essay on npa situation of ind...
NPA plays an important role in every economic condition and also the main cause of the increase in the current account deficit. Interest rates, Loan, Housing Loans, CRR, SLR all are directly affected by the system. The Corporates also affect the impact of higher NPA. Stress in banking sector causes less money available to fund other projects ...
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. Types of NPA's: Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets:-. Substandard assets: An assets which has remained NPA for a period less than or equal to 12 months.
Gross non-performing assets (NPA) of banks increased to 11.50% of total loans in 2017 which was 2.3% in 2008. However, as per Economic Survey 2019, the gross non-performing asset (NPA) ratio of public sector banks (PSBs) decreased to 10.1% in December 2018 which was 11.5% in March 2018. Though after initiating various measures to tackle the NPA ...
A commonly accepted definition of NPA is: "An asset, including a leased asset, becomes nonperforming when it ceases to generate income for the bank." Best MBA college in Bangalore. Possible Reasons for Rising NPA in Banking. Credit Boom: The problem of rising NPA was magnified during the credit boom of 2003-04. During this time, the world ...
Public sector banks (PSBs) accounted for ₹8.9 trillion, or 86%, of the total NPAs. The ratio of gross NPA to advances in PSBs was 14.6%. These are levels typically associated with a banking crisis. For example, in 2007-08, NPAs totalled only ₹566 billion (a little over half a trillion), or 2.26% of gross advances!
This means that about 10% of loans are never paid back, resulting in substantial loss of money to the banks. When restructured and unrecognised assets are added the total stress would be 15-20% of total loans. NPA crisis in India is set to worsen. Restructuring norms are being misused.
The evidence of wholesale misuse is visible in Figure 2 where immediately following 2008, we see a noticeable spike in the. proportion of restructured Loans in the total stressed assets (DA = RAs + NP As) whereas. the NPA ratio stays low as late as 2013. The possibility of regulatory arbitrage by way of.
behind the NPA and its impact on banking operations. Key Words: Annova, Net Non-Performing Assets I. Introduction: In the starting when the financial reforms were undertaken by the Government of India based on the Narasimham Committee report I and II, Reserve Bank of India introduced some prudential norms to address the
Non-Performing Assets are assets that stop paying investors for a set time (NPA). India's public sector banks hold 90% of NPAs. Due to long-term operations, infrastructure generates most NPAs. As per the recent data by RBI, the Scheduled commercial banks' net non-performing assets (NPA) ratio fell to a 10-year low of 3.9 per cent in March 2023.
Non-performing asset (NPA) refers to the classification for loans or advances that are in default or in arrears. An asset including a leased asset, becomes non-performing when it ceases to generate income for the bank. Loan arrears: principal or interest payments are late or missed and Loan default: Lender considers the loan agreement to be broken and the debtor is unable to meet obligations.
Fiscal Policy. This article is based on "Some key lessons from the NPA crisis" which was published in The Hindu Business Line on 18/12/2019. It highlights the reasons for rising Non-Performing Assets (NPAs) and the lessons that regulators need to learn from it. Despite the introduction of prudential norms and a stringent regulatory ...
The most important step that govt needs to take is better regulation, monitoring, and functioning of PSBs, capital infusion and structural reforms in the economy to tackle the NPA problem. Answer: The government of India is planning to set up a Bad Bank to rescue the banking system from the rising non-performing assets.
The problem of NPAs in the Indian banking system is one of the foremost and the most formidable problems that had impact the entire banking system. Higher NPA ratio trembles the confidence of investors, depositors, lenders etc. It also causes poor recycling of funds, which in turn will have deleterious effect on the deployment of credit.
Essay discusses NPA Problem of India by pshivendu
Find an answer to your question Write a short essay on npa in 250 words. csang3379 csang3379 12.03.2019 English Secondary School answered • expert verified Write a short essay on npa in 250 words See answers ... 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.
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1 essay(s) found. These days, in an era of widespread media and ever-advancing communications technologies, people are kept abreast of events and occurrences all around the globe. In regard to the use of mass media, some people believe that there ought to be a worldwide ban on the broadcast of teenage suicides by dint of potential negative ...