NPA crisis valley: Has Indian Economy managed to come out it?

NPA crisis valley: Has Indian Economy managed to come out it?

A number of Indian economists have been trying to get away with the relentless cycle of NPA crisis. But how far can we stretch the situation? The NPA crisis in India alarms economic policy framers with an urge to decipher it at the earliest. 

As per Finance Market Research Reports, the current year witnessed the waning of the effects of the NPA crisis, its decline dropping around 10.8% in September 2018 to a significant 10.3% in September 2019. The seeds of the dipping were already sown in March 2018 that showed a comparative high of around 11.5%. Public Sector banks enjoyed a performance improvement as their credit rates grew by at least 3% approximately. 

But, when did it all begin?

During the tenure of Economist Raghuram Rajan, he put forward his take on the root of the NPA crisis in which he also strived to shed light on the possible reasons for the NPA crisis in India. According to him, the catastrophe is more than a decade old when the economy had begun to bloom again. The likelihood of banking professional extrapolating about economic conditions is high in such cases. 

The possible reasons:  

  • Over-optimism:
  • Slow Growth
  • Government Permissions and Foot-Dragging
  • Loss of Promoter and Banker Interest
  • Malfeasance
  • Fraud

Where did it go wrong in controlling the initial NPA?

Dating back to 2006-08, a large number of bad loans emanated though the economy was going through a strong growth phase. Since the infrastructure and other such big projects had been completed within time and given budget it built trust in financial institutes for the raised loans for different projects. Be it PSBs or RBI, none of the finance institutes took a strict action over the increasing bad loans and failed to understand the darker picture of NPAs. 

What has happened in the last five years?

The government viewed the long stretched finance crisis of the economy differently at different points in time. 

Though the year 2018 showed a considerable improvement in the credits, it was majorly from the private sector. Public banks have failed to deal with its debtors while they have added more bad debtors to the list. 

Today’s situation: 

Presently, India is observing a continued spike in its bad loan number as the losses double with both private and public financial institutions. However, the net NPA is said to be reduced from 48.6 thousand crores to 30 thousand crores. As on 31st March 2019, around 1142 are announced to be wilful debt dodgers. India has been trying to restructure the debt system for the past five years and the present circumstances are only adding to the bad loan mess. 

What next?

A feature in India’s inflation targeting framework is likely to be beneficial to resolve the NPA crisis. The economic notion is proposed by the Urjit Patel Committee, addressing the long-continued insolvency catastrophe.

Commenting on the recovery, MS Sahoo, Chairperson of Insolvency and Bankruptcy Board of India said, “We are seeing active companies coming to the IBC system and we expect 100 percent recovery for the creditors”. 

The RBI also witnessed contamination of fresh loans around this time, resulting in a decline of both credit ratings and deposits. In spite of PCAs being implemented across affected PSBs, India has a long way to go in terms of recovery. High through the recovery cost of repairing poor assets, there is hope for better credit assessment and operative procedures.

The central bank’s old circular on insolvency will finally be replaced as it sets new guidelines on 7th June 2019. The new policies are interesting enough to address the issue with a new and modern approach. 

In the new guidelines, the time period for solving debts has been extended. Not only has it helped banks but also companies who found themselves wide open to the crisis in the first circular. The replaced directions set a more compliant solution to the problem for both parties. 

RBI easing norms for defaulting corporates are expected to help India to come out of the NPA crisis valley. Though on paper the new circular seems promising, its application and practical response from the financial organization & end parties may turn out to be different. It will be a gripping situation in the finance industry in India in the near future. The question still remains unanswered. Will India come out of NPA crisis valley? 

  – Written by Gauri Ludbe 

Business Writer

JSB Market Research

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