Declining NPAs in India: A Banking Sector Turnaround

Context

Finance Minister Nirmala Sitharaman announced that gross NPAs of scheduled commercial banks dropped to 2.5% in September 2024, the lowest in years. Public sector banks (PSBs) recorded their highest-ever net profit of ₹1.41 lakh crore, with further growth expected.

What are NPAs?

A loan becomes an NPA when a borrower fails to repay principal or interest for a specified period.

RBI Definition:

• Term Loans: Overdue for 90+ days.

• Overdraft & Cash Credit: Exceeds sanctioned limit for 90+ days.

• Agricultural Loans: Unpaid for two crop seasons (short-term) or one crop season (long-term).

Categories of NPAs

• Substandard Assets: NPA for less than 12 months.

• Doubtful Assets: NPA for more than 12 months.

• Loss Assets: Unrecoverable loans, though not officially written off.

Causes of NPAs

Internal Factors

• Poor loan assessment by banks.

• Misuse of funds by borrowers.

• Wilful defaults by corporates.

• Weak loan monitoring.

External Factors

• Economic downturns.

• Policy delays in projects.

• Global financial crises.

• Natural disasters affecting farmers.

Impact of NPAs

• Lower Bank Profits: Reduced income from interest.

• Credit Crunch: Banks hesitate to lend, slowing growth.

• Investor Concerns: Weak banks deter investments.

• Higher Public Burden: Government may need to recapitalize banks.

Measures to Reduce NPAs

Legal & Regulatory Steps

• SARFAESI Act (2002): Allows banks to seize and auction assets.

• IBC (2016): Fast-tracks resolution of bad loans.

• PCA Framework: Restricts weak banks to prevent further NPAs.

Institutional Solutions

• ARCs: Buy NPAs and recover dues.

• Bad Bank (NARCL, 2021): Takes over large NPAs for structured resolution.

Bank-Level Reforms

• Stronger loan screening before approval.

• Restructuring options for stressed borrowers.

• One-time settlements for quick resolution.

Conclusion

India’s NPA levels have significantly improved, strengthening financial stability. Continued policy reforms, risk management, and faster resolution will ensure long-term economic resilience.