The gross non-performing asset (GNPA) ratio for Scheduled commercial banks (SCBs) has significantly decreased. According to the recent Reserve Bank of India (RBI) report, it fell from 3.9% at the end of March 2023 to 3.2% by the end of September, 2023.
Non-Performing Asset: What Does It Mean?
The RBI defines a non-performing asset (NPA) as an asset that stops generating income for the bank. An NPA generally refers to a loan or advance for which the borrower hasn’t made principal or interest payments within a specific period. For most debts, a minimum overdue period of 90 days classifies them as non-performing. However, for agriculture, the loan becomes an NPA if principal and interest aren’t paid for two cropping seasons.
Classification of NPAs
Banks must further classify NPAs into three categories based on the duration of non-performance and dues’ realizability:
1. Sub-standard Assets: These are assets classified as NPAs for a period less than or equal to 12 months.
2. Doubtful Assets: These include assets that have been non-performing for over 12 months.
3. Loss Assets: These are assets deemed uncollectible with little or no hope of recovery and need to be written off entirely.
Gross NPA and Net NPA Defined
The Gross NPA (GNPA) is the total amount of NPAs before subtracting the provisional amount. On the other hand, Net NPA refers to the GNPA after deducting the provision. A provision is a certain fund allocated by banks to cover potential losses from NPAs.
Provisions to Deal with NPAs in India
To deal with NPAs, India has several provisions in place:
1. The Recovery of Debts due to Banks and Financial Institutions Act (RDB Act), 1993: The act established DRTs and DRATs to quickly adjudicate and recover bank debts.
2. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), 2002: This act allows banks and financial institutions to seize and sell defaulting borrowers’ secured assets without court intervention.
3. The Insolvency and Bankruptcy Code (IBC), 2016: The IBC provides a fast-track corporate insolvency resolution process for stressed assets. Since the IBC’s inception, it helped resolve Rs 3.16 lakh crore of debt stuck in 808 cases.
Write-Offs and Their Role
A write-off denotes the removal of an NPA from the bank’s books as an acknowledgment of the improbability of debt recovery. Although this action doesn’t absolve the borrower from repayment, it accepts the unlikelihood of recovering the debt.
The Process of Upgrades
Upgrades refer to reclassifying a loan account from NPA back to a “standard” asset category. For this to happen, the borrower must pay the arrears of interest and principal.
Recoveries and their Impact
Recoveries are the funds or assets banks regain after taking actions to collect on defaulted loans or NPAs. Recoveries can come in different forms – repayments, collateral liquidation, or settlements after pursuing recovery mechanisms.
Understanding The Scheme for Sustainable Structuring of Stressed Assets (S4A)
The term ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’ often seen in the news, is a scheme of the RBI for reworking the financial structure of big corporate entities facing genuine difficulties. This was a previous year question in the UPSC Civil Services Examination in 2017, where it was accurately described in option (b).
