Growth of Non-performing Assets (NPAs) in India's Banking System

Dr Raghuram Rajan, the outgoing governor of RBI while addressing the 10th Statistics Day conference at the RBI headquarters said “As with inflation, it was the duty of the central bank to press for bank clean-up earlier, when few among the public support the central bank's activism"¹ indicating the need to for bank to clean bad loans should have started earlier. NPA is defined as “a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.”The RBI in December 2015 released a list of 150 truant borrowers and directed banks not to sweep their bank accounts under the carpet.RBI has also set an ambitious deadline of March 2017 to clean up bad loans.

The proactive approach of RBI raises a pertinent question as to “Why the cleanup of bad loans is central to RBI and What implication does it have on the Indian economy?” The answer lies in the scale of accrued NPA over the past year and banks ability to provide capital. In emerging economies like India “banks are more than mere agents of financial intermediation and carry the additional responsibility of achieving the government’s social agenda also” as identified by PWC report on Growing NPAs in banks Efficacy of credit rating agencies². The argument become all the more relevant when the government is trying to boost entrepreneurial development and indigenous production to counter trade deficits by launching schemes like Make in India, Stand up India and MUDRA. The Gross Non performing Asset as of Sep 2015 stands at Rs 3, 41,641 Crore up from Rs 53,917 Crore in September 2008.In other words, GNPA as a percentage of total loan has increased from 2.11% to 5.08%.

The above facts and figures if seen in isolation may not be intimidating but when seen in comparison the picture is more subtle. The actual fiscal deficit stands at Rs 5, 10,725 Crore, the GNPA would have covered two-third of the fiscal deficit ignoring the interest that would have accrued on the amount. The start up and stand up India scheme which aims to promote entrepreneurship among SC/ST and women and benefit at least 2.5 Lakhs entrepreneurs is allocated Rs 1100 Crore³ which is just 0.32 % of the GNPA. The point to be noted here is the money could have been better utilized and such large scale risky exposure could have been avoided.


The health of our PSU which has the maximum share, nearly 90%, in the GNPA is also a major cause of concern and it has increased from March 2014 to Sept 2015 in spite of the best efforts by government. Presently the stressed asset among PSU has reached an alarming proportion of 112% of equity. The piling of such high bad debt adversely affects the ability to provide credit and undermines the growth prospect by impacting PSB’s Loan book growth. The high GNPA led to central government having to infuse Rs.22, 900 Crore capital in public sector banks. However, rating agency ICRA said the infusion will not be sufficient to cover the capital requirement. This could lead to loans becoming expensive or scarce, which can hurt the growth target of 7-7.5 in terms of GDP as envisaged in the Union budget⁴.

Courtesy: Economic Times

Courtesy : Economic Times

The NPA is also indicative of exposure to the various sectors and there proportionate contribution to NPA partially indicates the state of the industry. There is a need to mitigate such huge exposure and subsequent risk. The banks had significant exposure to the aviation sector and especially to the now grounded Kingfisher Airlines, the combined loans to Kingfisher stood at nearly Rs 6902 Crore. The banks should have ventured with caution when sanctioning such high credit and a proper risk analysis should have been done. The disproportionate allocation of credit can lead to certain key sectors devoid of growth opportunities.

The rising NPA has affected the profit of PSU banks significantly and has reduced the confidence of investors and the general public in banking sector, however the steps taken by government and banks to clean the balance sheet is a step in the right direction. The bank should move towards dynamic portfolio mix to align its exposure in line with risk strategy and in term of sector wise monitoring it should formulate early warning systems to be in a better position to mitigate high risks. It should ensure real time credit rating and regular checks of the companies it is lending to in order to avoid default.

Public Sector Banks has a huge relevance in the growth story of India as they serve a large population and are instrumental in reaching out to the disadvantaged section of the society, thus is of prime importance that they remain solvent and in good health.