Rising N.P.A.’s - an analysis

Rising N.P.A.’s - an analysis

For a few weeks the rising NPA (non performing assets) or bad loans have been in news and for all wrong reasons. The rising bad debts of Indian bank have become a cause of worry for the RBI and govt. recently Union Bank of India saw a steep rise in its NPA and that resulted in its CMD Archana Bhargava’s resignation.

Rising NPA signifies that bank has given loan to firms or individuals and is not able to recover the same. Just to remind, the US subprime lending crisis, to some extent, was triggered also because of this reason. So let’s find out about the causes and effects of rising NPA:-

Causes and effects

1. Public Sector banks provide around 80% of the credit to industries and it is this part of the credit distribution that forms a great chunk of NPA. Last year, when kingfisher was marred in financial crisis, SBI provided it huge amount of loan which it is not able to recover from it.

2. If Indian industry is in crisis, it is bound to hit the banking sector and their NPA will rise.

3. Only PSBs can’t be blamed for the situation. The economic policy of the government and also politician-corporate nexus is behind the current state of banking industry.

4. If the NPAs keep rising in the current state like that of Kotak Mahindra or Union Bank, it will lead to shutting down of bank and it can also create a very serious economic crisis in the nation.

5. One of the main reasons of rising NPA is the relaxed lending norms especially for corporate honchos when their financial status and credit rating is not analyzed properly. Also, to face competition banks are hugely selling unsecured loans which attributes to the level of NPAs.

6. Global economy can effect the banking sector but to a very small extent. It is the policies of RBI and govt. that can improve the situation.

7. If the status of NPAs in banks is not controlled, banks can become bankrupt. The entire credit distribution structure of the economy can be destructed and the country could be in a major financial turmoil.

8. When US hit the subprime crisis, it was because of the lenient lending norms and baks had huge number of loan defaulters. The big banks filed for bankruptcy and US economy went jittery. So, NPA problem is to be taken seriously.

Conclusion
The rising NPA is a major problem for the future economy of the country. To improve the situation, RBI must bring in strong regulatory processes to ensure that loan is not provided without the credit rating of that firm or corporate houses.

Also, the govt. must bring in capital infusion plans for the bank so that they can fulfil the BASEL-3 norms and can suffer the current crisis.