NPA in Banking | Essay for RBI Grade-B Main

When a bank offers a loan, it charges interest on the amount, which is why it is regarded as an asset to the bank. When the borrower stops paying the interest, or the principal, or both, the lender loses money. Such a loan then becomes a non-performing asset (NPA) for the bank. The banking industry in India is seriously affected by the NPA crisis with the rising number of defaulters.

As per the Reserve Bank of India (RBI), a loan is considered a “bad loan”, or an NPA when the interest due for any quarter is not fully paid within 90 days from the end of the quarter. However, this time period may vary based on the terms and conditions agreed upon by the bank and the borrower.

A commonly accepted definition of NPA is: “An asset, including a leased asset, becomes non­performing when it ceases to generate income for the bank.”

Possible Reasons for Rising NPA in Banking

  1. Credit Boom: The problem of rising NPA was magnified during the credit boom of 2003-04. During this time, the world economy, as well as the Indian economy, was booming; and hence, multiple Indian firms borrowed a lot to avail of the growth opportunities.
  2. Tightened Monetary Policy: The RBI followed a tightened monetary policy at that time, increasing the repo rate and reserve repo rate. However, even after that, there was credit expansion that led to a rising NPA ratio.
  3. Stalled Judicial & Legislative Procedures: The judgments given by courts at the time were not in favor of businesses; and had an adverse impact, especially on the mining, power, and steel sectors. Moreover, businesses faced problems in acquiring land, which led to many projects getting stalled.


The combination of the above factors, along with regulatory control, made it difficult for companies to repay the loans. Some of the other factors that made the NPA crisis even worse are:

  1. Severe competition in specific market segments
  2. Natural reasons, like flood, drought, earthquake, etc.
  3. Misgovernance and policy paralysis that affected the timeline, thereby, increasing the project cost (for example, in the infrastructure sector)
  4. Maladministration by corporates
  5. Slowdown in specific industry segments

Initiatives to Tackle the NPA Crisis in Banking

Although it has risen disproportionately in contemporary times, NPA is not a new problem. Over the years, there have been several reform measures undertaken by the government at various levels to bring it down. Some of the important ones are:

  1. Debts Recovery Tribunal (Procedure) Rules - 1993
  2. The Credit Information Bureau (India) Ltd - 2000
  3. Lok Adalats -2001
  4. Compromise Settlement - 2001
  5. SARFAESI Act – 2002
  6. Asset Reconstruction Companies (ARC)
  7. Corporate Debt Restructuring - 2005
  8. Joint Lenders’ Forum - 2014
  9. Mission Indradhanush - 2015
  10. Strategic Debt Restructuring - 2015
  11. Asset Quality Review - 2015
  12. Sustainable Structuring of Stressed Assets - 2016
  13. Insolvency and Bankruptcy Code - 2016
  14. Public ARC Vs Private ARC - 2017

Resolution of NPA Crisis in India

The need of the hour is to understand the criticality of the NPA crisis; and take appropriate remedial action. These actions should include:

  1. Using data analysis and technologically upgraded frameworks to identify the warning signs early
  2. Formulation of Mechanisms to identify hidden NPAs
  3. Development of internal skills for efficient credit assessment.
  4. Conducting forensic audits to understand the intent of the borrower.

As a banking aspirant, you should be well versed in all the initiatives undertaken to tackle the NPA crisis in India. Especially important is the Mission Indradhanush, which was launched in 2015. It follows the ABCDEFG methodology to revamp the public sector banks and improve their overall performance. It can be asked as a standalone topic in the essay writing. Hence, you must prepare it in detail.

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