Banking Sector woes: rising Non-Performing Assets

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Non-Performing Assets: Indian Banking Sector

Raghuram Rajan’s tenure as the Governor of the Reserve Bank of India was defined by inflation targeting and an attempt at keeping bank Non-Performing Assets low. The number in terms of currency that is fully convertible at the international level stands at $138 billion. Bank assets are classified and categorized as Non-performing assets, depending on the returns the bank receives on the loan having been provided on assets earmarked for the purpose. Even under this category, depending on the number of days no payment has been made in terms of EMIs or the pre-decided plan of repayment, different categories have been created. One of these which comes into the picture when it is believed that there is little hope of getting returns and it can only be written off or sold off to an asset recovery organization as a securitized product is the ‘Non-Performing Asset’ category.

RBI: Tools for rate change

A basic understanding about Non-Performing Assets is especially valuable if you are a banking aspirant. The banking sector has suffered in the last few years as NPAs have only spiralled despite Government efforts to support credit through other initiatives like new banks for entrepreneurs and even specific female-centric banks. The Reserve Bank of India has not given policy support through a reduction in interest rate. It cannot be said though that money supply was not increased as CRR was reduced and at times SLR was also slashed. CRR and SLR refer to cash credit ratio and statutory liquidity ratio. It was felt that these moves did increase the money supply so as to support credit for the industry but a concomitant reduction in interest rates never came about. Therefore, transmission of change in money supply factors as it comes from RBI never really came about. The Banking sector has now seen a transition from being under the watchful eyes of Mr. Rajan to Urjit Patel, who is continuing his association with the bank but is now being seen as the dove who could change the direction of interest rate movement and would bring it in line with expectations of the Government and the public in general.

Corporate Defaulters major contributors

As even the likes of United Breweries, United Spirits represented earlier by Mr. Vijay Mallya joined the list of ‘Wilful Defaulters’ it is but natural that NPAs would see an increase that would become a cause of concern for the regulatory body at the helm of managing the banking system. Even when SBI is seen as a bank that is ‘too big to fail’, the worries associated with stemming the rise in NPAs is not unfounded but only depicts that the regulator is efficiently performing the task that forms the basic premise of it having come into existence.

The NPAs associated with the Indian banking sector have now reached $138 billion. RBI is careful in ensuring that wherever there is a risk of a sudden surge in NPAs in the near future, a write-off is absolutely essential. This was seen in the recent times in case of certain banks belonging to the Government sector, including even the Punjab National Bank, wherein it was felt that the grain stocks having been purchased from the credit availed from banks existed only on paper. The case related to the Food Corporation of India’s purchases made in Punjab. RBI was careful in ensuring that these are designated as NPAs and provision is made keeping those loans as the ones that can go into the red. Banking sector aspirants would do well to know about the happenings of the banking sector that can increase the NPAs substantially and the action taken by the Reserve Bank of India when such a situation is encountered.

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