SUBHRAPRAKASH MONDAL INDIAN INSTITUTE OF MANAGEMENT UDAIPUR (PGP 2014-16)

NPA: A Threat in Indian Banking Sector

On July 21, 2015, Mr. Jayanta Sinha, Honorable Minister of State for Finance, have informed in Parliament

about continuously growing NPA (Non-Performing Asset) ratio in public sector banks in recent years. Gross

NPA ratio has increased to 5.43 percent in FY 2015 from 4.72 percent in FY2014 at public sector banks.

According to Mr. Sinha’s report, gross NPA at public sector banks was Rs. 2.67 lakh crore as on March 31,

2015, compared to 2.16 Lakh crore at March end 2014. In May 2015, a report from RBI says, asset quality

of Indian banking sector became worse with 4.45 percent increase in NPA ratio during FY 2015 compared

to 4.1 percent increase during FY2014. From both the report, it is clear that in terms of NPA; nationalized

banks are performing bad compared to the private banks and foreign banks. Figure 1 demonstrates the same

for the period of 2010-2014.

Figure 1: Gross NPA Trend in Indian Banking System (in Rs. million)

Source: http://dbie.rbi.org.in/OpenDocument/publicOpenDocument.jsp?iDocID=17409896

Increasing NPA are affecting capital adequacy ratio (CAR) of banking system adversely. It is alarming for

the poorly managed banks because it may cause slipping of CAR of that bank below the regulatory

requirement of 9 percent. RBI is worried about the public sector banks as their CAR has slipped to 11.24

percent in FY2015 from 11.40 percent in FY2014 with the increase of NPA ratio. Overall, the CAR of the

banking system is deteriorating continuously which has fallen to 12.70 percent in the recent financial year

compared to 13.01 percent in the previous year.

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2010 2011 2012 2013 2014

STATE BANK OF INDIA & ITS ASSOCIATES PRIVATE SECTOR BANKS

NATIONALISED BANKS FOREIGN BANKS

OVERALL YOY CHANGES

SUBHRAPRAKASH MONDAL INDIAN INSTITUTE OF MANAGEMENT UDAIPUR (PGP 2014-16)

As per recent Financial Stability Report, published by International Monetary Fund (IMF), 36.9 percent of

loan book of banks, operating in India, is at risk. It is highest among emerging economies while our

financial system has a loss-absorbing buffer of 7.9 percent only. Thus, NPA becomes not only a headache

for the Indian Banking system but also a threat if it is not controlled properly.

RBI has stepped into this problem considering its importance to control. Early recognition of distressed loan

has been considered with the highest priority to rectify and to restructure it promptly. RBI has issued several

guidelines that include, ‘Framework for Revitalizing Distressed Assets in the Economy’, ‘Joint Lenders’

Forum (JLF)’, ‘Corrective Action Plan (CAP)’, ‘Refinancing of Project Loans’, ‘Sale of NPAs by Banks’

etc.” Issuing guidelines and restructuring framework are not enough to overcome NPA threat. Proper

implementation and collaboration from all stakeholder and the government is very much important in that

case.

Reference:

1. https://www.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=955

2. http://articles.economictimes.indiatimes.com/2015-07-21/news/64683101_1_lakh-crore-psbs-debt-

recovery-tribunals

3. http://www.business-standard.com/article/finance/banks-gross-npa-ratio-rises-to-4-45-from-4-1-in-1-

year-rbi-115050601332_1.html

4. http://www.business-standard.com/article/finance/rbi-relaxes-norms-for-npa-provisioning-

115033000422_1.html

5. http://dbie.rbi.org.in/OpenDocument/publicOpenDocument.jsp?iDocID=17409896