How can banks reduce npa

Standard assets— no provision in Standard assets are those assets which are running good without any default. Previously there was no clause for provisioning of these standard assets. Subsequently banks were directed to provide on their standard assets also at the following rates:. Direct advance to agriculture or small and micro enterprise : 0.

If it is analysed critically it would be evident that the banks started incurring losses after implementation of Narsimham Committee recommendations. Due to provisioning of assets in standardized form, the erosion of capital of the banks started.

Thereafter the concept of strong banks and weak banks came into effect. For survival of weak banks the government started recapitalizing the weak banks. RBI and government started pressuring the banks to implement stringent methods for recovery of the NPAs and to improve their balance sheets. On critical analysis it has been observed that major portion of NPAs is contributed by several top industrialists.

Generally the NPAs in agriculture and priority sector is comparatively lower than that of the corporate houses. It is said that due to government policies of waiving agriculture loans in cases of floods, droughts and natural calamities burden of NPAs of all PSBs is increasing.

Generally marginal farmers and small entrepreneurs pay their loans in due time which is evident from surveys by different agencies. Though the government has enacted SARFAESI Act in that empowered the banks to acquire the mortgaged land, building, etc and dispose the same in auction for recovery of bad loans but the banks are still facing problems while implementing the said Act.

Some are macroeconomic factors such as lower exports due to global recession, downturn in commodity price cycles, etc. But as economic growth stagnated post the global financial crisis of , the repayment capacity of these borrowers declined. Also political factors like crony capitalism too has caused high NPAs in India. Further, recently there have also been frauds of high magnitude that have contributed to rising NPAs.

Although the size of frauds as compared to the total volume of NPAs is relatively small, these frauds have been increasing, and there have been no instances of high profile fraudsters such as Vijay Mallya, Nirav Modi and Mehul Choksey being penalised.

The main proposals are:. Banking sector performance had improved in FY Then the Covid crisis emerged and loan moratorium was announced by RBI.

RBI had announced loan moratorium on banks to salvage borrowers due to Coronavirus. Loan moratorium means that the borrowers will not be required to pay interest and principal components of the loan to the bank during the moratorium period. This is to encourage borrowers to increase their spending and businesses to thwart low business confidence and expand and continue their businesses buoyantly so that economic growth does not be spoiled. Gross NPA declined to 8. Gross NPAs would rise to Credit growth to industry slowed to 0.

A loan can be classified as a nonperforming asset at any point during the term of the loan or at its maturity. The lender may be required to categorize the loan as nonperforming to meet regulatory requirements. Alternatively, a loan can also be categorized as nonperforming if a company makes all interest payments but cannot repay the principal at maturity. Carrying nonperforming assets, also referred to as nonperforming loans, on the balance sheet places significant burden on the lender.

The nonpayment of interest or principal reduces the lender's cash flow , which can disrupt budgets and decrease earnings. Loan loss provisions , which are set aside to cover potential losses, reduce the capital available to provide subsequent loans to other borrowers.

Once the actual losses from defaulted loans are determined, they are written off against earnings. Carrying a significant amount of NPAs on the balance sheet over a period of time is an indicator to regulators that the financial fitness of the bank is at risk.

Although the most common nonperforming assets are term loans, there are other forms of nonperforming assets as well. Banks are required to classify nonperforming assets into one of three categories according to how long the asset has been nonperforming: sub-standard assets, doubtful assets, and loss assets.

A substandard asset is an asset classified as an NPA for less than 12 months. A doubtful asset is an asset that has been nonperforming for more than 12 months. Loss assets are loans with losses identified by the bank, auditor, or inspector that need to be fully written off.

They typically have an extended period of non-payment, and it can be reasonably assumed that it will not be repaid. Lenders generally have four options to recoup some or all losses resulting from nonperforming assets. When companies struggle to service their debt, lenders may take proactive steps to restructure loans to maintain cash flow and avoid classifying the loan as nonperforming altogether. When loans in default are collateralized by the borrower's assets, lenders can take possession of the collateral and sell it to cover losses.

Lenders can also convert bad loans into equity , which may appreciate to the point of full recovery of principal lost in the defaulted loan. When bonds are converted to new equity shares, the value of the original shares is usually eliminated. As a last resort, banks can sell bad debts at steep discounts to companies that specialize in loan collections.

Lenders typically sell defaulted loans that are unsecured or when other methods of recovery are deemed to not be cost-effective. Fixed Income Trading. Personal Loans. Purchasing A Home. Loan Basics. Your Privacy Rights. This ensures good pricing power and sustainability of above average NIMs net interest margins. That sourcing home loans for parent HDFC is a huge advantage for the bank cannot be undermined. But even otherwise being extremely conservative with margins and provisioning policies has been very rewarding.

All this while, its net NPAs have never crossed 0. Even in the year , where the entire banking industry was hit due to the pandemic, HDFC Bank reached out to large corporates for their funding requirements, which it could do because of its strong balance sheet. Despite above average loan growth, even in the most difficult of times, IndusInd Bank has not compromised on its asset quality. The bank also has a leadership position in certain retail asset classes with a pan India franchise which has strengthened its ability to manage the asset quality in those segments.

The bank is the third largest Indian private sector bank by market capitalisation. Over the last couple of years, Kotak Mahindra Bank has demonstrated a highly consistent and healthy historical track record.

The bank has sustained net NPAs below 1. Its institutional memory of tiding over one credit crisis after the other for nearly 25 years has also served it well. This has been supported by a healthy contribution of low-cost deposits current and savings accounts. However, net NPAs still came in below 1.

It has a customer base of over 10 m, including 1. The bank constantly improves its collection and recovery architecture to improve its asset quality. It also uses various analytics tools to predict the propensity to default and collection score of the borrowers.