NPA Rebuttal to Nupur Anand

By- Gunisha Dhawan

I’ve always been very pessimistic about the banking sector and the economy of
India, but in the last 4-5 years, I’ve been proven wrong. The steps being taken to
improve the situation of the existing banking scenario might have a slow progress
rate but if considered in the long run, they have the calibre of bringing about positive
changes. Let’s consider the case of NPAs.
In an article I recently read in Quartz, talking about the bad loan storm coming to
India, https://qz.com/india/1543711/indias-sbi-pnb-others-may-face-a-rs3-5lakh-
crore-npa-problem, an NPA has been defined as a loan whose principal or interest
amount has been overdue for 90 days or more. But, what people don’t know is that
the RBI has a different way of classifying a loan as an NPA. It states that asset
classification can be done in three categories-
 A sub-standard asset- one which has remained an asset for a period of less
than or equal to 18 months
 A doubtful asset- one which has remained an asset for a period of more than
18 months
 Loss asset- one where loss has been identified by the bank or internal or
external auditors or the RBI inspection but the amount has not been written
off wholly

These are the guidelines we should follow while categorizing NPAs since these have
been given in the RBI handbook. Also, if we consider these guidelines, it becomes
clear that a lot of assets are not NPAs but have been incorrectly identified as stressed
assets.

Yes, a growth in the number of NPAs has been observed till the last quarter of 2017
but ever since that, the number of NPAs have been on a slow decline because of a
number of reasons.
A lot of these loans were taken from the Public Sector Banks which have been hit
by the loan crisis, but what people forget is, that 70% of the banking done in India
is done in Public sector banks only. When you buy most of your groceries from one
store, and you haven’t received your salary for a month, obviously you’ll have a
higher amount of money that you owe to this particular grocery store and not much
to do with the other stores. In the same way, Private Sector Banks although they
have been hit by the loan wave, it hasn’t been as strong as the public sector wave.
But this comparison is wrong because the private sector banks in India are not as
involved as the Public Sector Banks.
To understand how NPAs are affecting the economy or the banking sector, it is first
important to understand how NPAs occur in India.
NPAs in India occur due to three reasons-
 Bad lending practices
 Downturn in the economy caused by the policy paralysis of the UPA
government
 The kind of business cycle a nation is in. Right now, we are in a positive
business cycle which basically makes the second reason redundant.
So, it can’t be said that we have a growing number of NPAs for now. Also, from
August to September in the last year, there has been a decrease in the number of non-
performing assets which has been observed because of the Insolvency and
Bankruptcy code.
In order to resolve the problem of NPAs, the Insolvency and Bankruptcy code was
introduced in 2016-17 which clearly outlines the separate insolvency resolutions for
individuals, companies and partnership firms. The IBC provides a resolution
framework that will help corporates clean up their balance sheets and reduce debts.
In order to get insolvency, a plea needs to be submitted, and a major factor that
makes the process effective is the adjudication by the Judiciary. The IBC also
prescribes strict time limits for various procedures under it. Once you’ve submitted
a plea for insolvency, there are 14 days to accept or reject it. If the plea gets accepted,
the tribunal appoints an Insolvency Resolution Professional (IRP) to draft a
resolution plan within 180 days. After this the court initiates the corporate
insolvency process. If the Corporate Insolvency Resolution Professional fails in
reviving the company, the liquidation process is initiated.
This bill has a certain procedure to be followed which makes sure that loans don’t
turn into NPAs. It also prohibits certain persons from submitting a plea for the
resolution plan like (i) willful defaulters, (ii) promoters or management of the
company if it has an outstanding non-performing debt for over a year, and (iii)
disqualified directors, among others. Further, it bars the sale of property of a
defaulter to such persons during liquidation.

The RBI data has revealed that under IBC, the NPA recovery rate is at 50% which
should be seen as a success as it was implemented just two years ago. Also, the RBI
states that against all the claims of Rs. 9900 crores in loan, the actual amount is
actually Rs. 4900 crores.

If we consider all these facts, it can be concluded that the loan condition of our
country is not as bad as it has been stated and it has already started looking better
even for what it was.
References
1- https://dbie.rbi.org.in/DBIE/dbie.rbi?site=home
2- https://www.businesstoday.in/current/economy-politics/insolvency-and-bankruptcy-code-ibc-npa-banking-
sector/story/264686.html
3- https://economictimes.indiatimes.com/news/economy/policy/ibc-mechanism-used-actively-to-resolve-npa-
problem-survey/articleshow/62693550.cms
4- https://www.financialexpress.com/economy/ibc-scripts-huge-success-in-just-two-years-rbi-data-reveals-npa-
receovery-rate-of-whopping-50/1427683/
5- https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?Id=449