Cleaning up of NPA mess will propel the economy

The banking sector has made significant progress in addressing the NPA crisis representing a shift towards a more transparent and responsible financial future.

To understand the complexities of India’s banking sector, one needs to grapple with a term that tends to recur with unsettling regularity – non-performing assets (NPA). In the realm of banking, NPAs serve as ominous indicators of systematically flawed lending practices. The NPA crisis once cast long and haunting shadows on the integrity of our financial institutions. It posed a troubling question: How could so many loans, particularly to large corporations, turn bad? The answer, distressingly, was a tangled web of non-transparency, political interference, and systemic corruption that was allowed to thrive unchecked under the United Progressive Alliance (UPA) government. This culture of irresponsible lending led to a surge in willful defaulters. These unfortunate missteps were not mere policy oversights. They represented a fundamental disregard for the principles of accountability, transparency, and fiscal prudence, which are critical to the robust functioning of any banking system.

The NPA situation in India before 2014 was severe. (Getty Images/iStockphoto)

The NPA situation in India before 2014 was severe. The gross NPA ratio of scheduled commercial banks (SCBs) stood at 4.9%, and ₹66.6 lakh crore in March 2014 were bad loans. The National Democratic Alliance (NDA) government took several steps to address the NPA problem, including setting up a new bad bank, the National Asset Reconstruction Company (NARC), to take over the management of stressed assets; introducing the Insolvency and Bankruptcy Code (IBC) 2016, which provided a framework for the resolution of stressed assets; and increasing the provisioning requirements for banks. Systematic and continuous efforts in the last nine years have effected a turnaround of the banking sector with robust growth. As per the Reserve Bank of India (RBI), scheduled commercial banks’ NPA ratio fell to a 10-year low of 3.9% in March 2023.

Public Sector Banks (PSBs) have also come a long way as their profits touched ₹1,04,649 crore in 2022-23. 12 PSBs witnessed a 57% increase in total profit compared to ₹66,539.98 crore earned in 2021-22. India’s largest lender, the State Bank of India, reported net NPAs of nearly ₹66,000 crore in 2018, but this came down drastically to ₹21,000 crore in FY23. The net NPA ratio also decreased. For FY23, SBI’s net profit crossed ₹50,000 crore, witnessing a growth of 58.6% year on year basis. Top private banks also have an NPA of less than 1%, and have posted huge profits. Private bank profits in FY23 were led by HDFC Bank at ₹36,961 crore, ICICI Bank at ₹23,339 crore, and Axis Bank at ₹13,025 crore.

PSBs are now utilising third-party data for in-depth due diligence at the loan sanctioning stage, mitigating risks from misrepresentation and fraud. The introduction of special mention accounts helps in the early detection of potential stress indicators in debt servicing, allowing banks to take preventative action against possible NPAs.

Comprehensive, automated early warning systems with around 80 triggers are being used by banks for timely remedial actions, enabling proactive stress detection and NPA reduction. Borrowers’ repayment behaviour is reported to credit information companies, which banks then use to inform their loan-sanctioning decisions, promoting better loan repayment habits.

As per the Economic Survey 2022-2023, the efforts of RBI and the government in terms of calibrated policy measures such as strengthening the regulatory and supervisory framework, implementation of the 4R approach of Recognition, Resolution, Recapitalisation and Reforms have culminated in the enhancement of risk absorption capacity and a healthier banking system balance sheet, both in terms of asset quantity and quality over the years. Today, we can confidently say that India’s banking sector, once embroiled in an NPA crisis, is well-positioned for sustainable growth, with a robust infrastructure that is more transparent, accountable, and resilient. The turnaround story scripted by the government signifies more than a successful policy implementation; it represents a shift in the economic ethos towards a more prudent and responsible financial future.

This transformation, underpinned by the principle of good governance, has set the stage for India to emerge as one of the top three economies in the coming years.

Shehzad Poonawalla is national spokesperson of the BJP, and Sandeep Mishra is member, UN Mastermind Groups 2022. The views expressed are personal.