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. Sinhas 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)
1600000

50%

1400000

45%
40%

1200000

35%

1000000

30%

800000

25%

600000

20%
15%

400000

10%

200000

5%

0%
2010
2011
STATE BANK OF INDIA & ITS ASSOCIATES
NATIONALISED BANKS

2012

2013
PRIVATE SECTOR BANKS

2014

FOREIGN BANKS

OVERALL YOY CHANGES

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.
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-debtrecovery-tribunals
3. http://www.business-standard.com/article/finance/banks-gross-npa-ratio-rises-to-4-45-from-4-1-in-1year-rbi-115050601332_1.html
4. http://www.business-standard.com/article/finance/rbi-relaxes-norms-for-npa-provisioning115033000422_1.html
5. http://dbie.rbi.org.in/OpenDocument/publicOpenDocument.jsp?iDocID=17409896

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