BAD LOANS
1. Context
In December 2022, Finance Minister Nirmala Sitharaman told Parliament that banks had written off bad loans worth ₹10, 09, 511 crores during the last five financial years.
A National Asset Reconstruction Company Ltd. (NARCL) was announced in the Union Budget for 2021-2022 to resolve stressed loans amounting to about ₹ 2 lakh crores in phases.
2. About Bad Loan
- A bad loan has not been 'serviced' for a certain period.
- Servicing a loan is paying back the interest and a small part of the principal depending on the agreement between the bank and borrower, to begin with, so that over time, you pay back the principal as well as the interest accrued in the duration.
- In 2009, the RBI brought out norms that set out categories of NPAs and what banks must do as these bad loans age.
- Bad loans are a problem for, with time, there is less and less certainty that the loan would be paid back in full.
3. RBI's circular
- The RBI's master circular in 2009 started off the journey of NPA recognition.
It states that if an asset has been 'doubtful" for a certain period, the value of that asset must be provided for in parts, as the asset ages. - There was a revision in October 2021 which made recognition far more stringent. Interestingly, even if the asset is standard and there is no problem with it, banks are expected to make provisions depending on the risk element for that sector.
- Home loans with teaser rates are at greater risk than those that are not.
- Hence provisions have to be made for such loans.
4. Recongisation of NPAs
- In the banking system, the government and regulatory authorities need to have a good view of how healthy the financial system is A weak financial system can eventually ruin lives and livelihoods.
- Unless we know we have a problem fixing it.
- India became more aggressive in recognising loans as "bad" in the 2014 to 2015 period.
- The periodic asset quality review was introduced. Further, the regulator stepped in to prevent the evergreening of loans (i.e. lending more to an already stressed asset in the hope that it could be brought back to its feet).
- With the transparent recognition of NPAs, this percentage for gross loans rose from 4.1 per cent in March 2014 to 11.46 per cent in March 2018.
- She said that with the government's strategy of recognition, resolution, recapitalisation and reforms.
- NPAs had since declined to 5.9 per cent by March 2022.
5. Recovery of loans
- Minister of State for Finance told the Rajya Sabha in December that loans written off by scheduled commercial banks (SCBs) during the last five financial years totalled ₹ 10.1 lakh crores.
- Significantly, only ₹1.32 lakh crore has been recovered.
- As a percentage of write-offs, this comes to only about 13 per cent.
- One explanation is that if an NPA is fully recognised in a particular year, even the fastest legal process may not resolve for full repayment.
- Not only do banks take significant haircuts when it comes to recovery but the amount to be repaid post-haircut may be delayed.
- Time will tell whether recoveries would eventually improve.
For Prelims & Mains
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For Prelims: Bad Loans, National Asset Reconstruction Company Ltd., scheduled commercial banks, RBI, Nonperforming assets.
For Mains:
1. What are the nonperforming assets .Discuss the government strategy for the recovery of loans. (250 Words)
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Source: The Hindu
