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Government Finally Moves Toward Solving India's Nagging NPA Problem

Fri, 5 May Pre-Open

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The Government has started to take steps in the right direction regarding India's long standing problem of NPAs. The banking sector especially public sector banks have struggled to contain this menace of NPAs. Note that the gross non-performing assets (GNPA) as a percentage of total advances had risen to as high as 7.6% in March 2016 from 5.1% in September 2015. This was the highest rise witnessed in twelve years.

Finally, the cabinet cleared the NPA resolution containing an ordinance that will effectively empower the Reserve Bank of India to directly deal with this problem. Although, RBI through earlier measures like strategic debt restructuring was trying to solve this very issue of rising NPAs. The current move will allow RBI to act as a mediator between the banks and defaulters to solve the issue of bad loans.

If the government manages to tackle this problem effectively, it will solve a major hurdle in India's growth story. Banks with lower NPA levels will be in a stronger position to extend credit to corporates which in turn will boost economic growth.

Not only corporates, NPAs also affects normal taxpayers and depositors. Banks have to take a huge provisioning hit when they loan goes bad. Remember this adversely impacts the bank's profitability. While the government banks survive due to annual capital infusion from the government, the money that is infused is the taxpayer's money!

But the move although positive, is entirely not clear in terms of its implementation. How large would a role would RBI play when a bank sanctions a loan to a corporate? And if it does have a major say, won't it affect the commercial operations of a bank in terms of its growth? These things will be clear once the Finance ministry comes up with elaborate details about the plan.

We hope that measure like the NPA issue resolution and implementation of key reforms like GST lay the platform for India to be one of the fastest growing economies in the world in the years to come.

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