CONSEQUENCES OF HIGH NPAs ON THE ECONOMY

Strength of the banking sector is one of the most important contributing factors of strong
economy because it channels the savings into the investment. A weak banking sector will
ultimately give direction to the weak economy.
NPAs plays very important role in the economy and factors like loans, interest rates, housing
loans, CRR (Cash Reserve Ratio), SLR (Statutory Liquidity Ratio) etc., are all directly
affected by them. Some of the major consequences of NPA are as follows:

1. Linkages with BASEL norms:

Recently in 2018, RBI has adopted the BASEL which talks about reservation of more
money by the banks against probability of default. This turns to be negative in terms
of NPA since they have a low liquidity which results in lesser reservation of money
by the banks. Hence, a lower interest rate for both the bank and the depositor further
causes loss for both parties. In many cases, the bank may charge a higher interest rate
for the borrower which, no doubt, would lead to inflation.
2. Increasing loan limits:
Possession of more NPAs may also have a negative impact upon loan-giving capacity
of banks. This has been much prevalent in real estate sector in India which in turn
leads to limited capital and limited chances to expand and grow, therefore
contributing to unemployment.
3. Financial instability:
Banks having higher NPA also tend to have unstable financial condition which further
impacts its profitability. Over time as the shareholders keep losing money, banks find
it difficult to survive in the market which leads to a crisis-like situation.
4. Current account deficit:
Higher NPA may also lead to increase of current account deficit which will directly
affect interest rate, housing loan, loan etc.

Apart from these four major impacts, NPA have other impacts, too. These are:
 Revenue amount of bank reduces gradually if there are NPA, also with the level of
confidence of consumers and depositors.
 Banks tend to impose many unnecessary charges like Withdrawal limit from ATM,
Withdrawal number of times, Internet transaction charges etc., to recover their losses
due to NPAs.
 In long-term these factors will force government to increase taxes in order to save
public banks which in turn will ‘hit’ the taxpayers.
 Since higher NPA result in a decreasing revenue for banks and lesser profitability, this
will also impact GDP growth of the country.
  The Rise of NPAs in the banks will lead to the scarcity of funds in the Indian markets.
And if there are less chances of recovery of loans, then only few banks will be willing
to lend.
 The situations of NPAs will be tough for the banks to survive, and due to this, the
shareholders of the banks will also lose money.
 Together, these factors will adversely affect market demand in Indian economy.
 The price of loans & interest rates will increase tremendously, which will directly
impact the investors will to take loans for building infrastructure and industrial
projects.
 This reduced investments because of NPA can also lead to increase in unemployment
in Indian economy.
 Crisis will further strengthen if the same phenomena keep occurring in a vicious
cycle.
 Both the Private Banks and the NBFCs have been relatively less impacted by the
increasing NPA trend. Therefore, these segments have been able to capitalize on the
curtailment of the PSU banks to increase their market share.
 Industry and infrastructure consist of the major contributors towards NPAs, and
because of this, the banks are now becoming reluctant to fund these sectors.
 NPA related cases also put extra burden on already burdened judiciary of India, by
adding a greater number of pending cases.
Overall, we can say that NPAs plays huge role in any countries economy, and beside of the
fact that they have been reduced in recent years by huge numbers, still the proportion of
NPAs are so great, that if by any chance, the state is able to recover all the NPAs, they can
change the situation of the economic conditions of our country.

The discussion on Non-Performing Assets in banking sector is being going on since a 1991.
The major concern for the RBI and the government is always been about how to realize the
defaulters account s and the recovery of those NPA’s. Basically, NPA’s in banking sector
means the bad loans from which the interests or repayments has been stopped coming. Now
to recognize the defaulters, RBI issued many guidelines/frameworks to deal with it. On
February 12, the RBI issued a circular stating to start the resolution process for the accounts
or account holders who’re defaulting for even one day. Seeing this short-term thing, many
firm/corporations filed a PIL against RBI regarding such short period. After some months,
Supreme Court asked RBI to revised their circular. In turn, RBI issued a revised circular
which states the banks can start their resolution process after the 30-days of default in
payments. For the increase in NPA’s, government has taken some major steps like
introduction and the implementation of the “4R” strategy. The 4R stands for, Recognition of
the non-performing assets, Recapitalization of the public sector banks, Resolution and
recovery of the loans/assets and the reforms.