From sinking ships to second chances, can NPA's be rescued?

Non-performing assets are financial nightmares for banks and institutions. Imagine loans or advances that stop generating income because borrowers haven't made payments—that's an NPA.

Assume this, instead of money flowing in, it gets stuck with delinquent borrowers. The longer debts remain unpaid, the higher the risk of them becoming unrecoverable losses. It's like a bucket with a hole - valuable resources drain away, impacting the entire financial system.

In brief, Non-performing assets (NPAs) refer to loans or advances that have not been repaid by the borrower and have remained overdue for a significant period. These assets do not generate any income for the lending institution and are considered a liability on their balance sheet.

Examples of NPA's in Banking

• Non-Performing Loans: These are loans that have not been repaid by the borrower and have remained overdue for a significant period. NPLs can be further classified into substandard, doubtful, and loss assets based on the likelihood of recovery.

• Defaulted Mortgages: When a borrower defaults on their mortgage payments, the loan becomes a non-performing asset for the bank. The bank may repossess the property and sell it to recover the outstanding amount.

• Unpaid Credit Card Debt: Credit card debt can become non-performing if the cardholder fails to make payments. Banks may write off the debt or sell it to a debt collector.

• Overdue Business Loans: Business loans can become non-performing if the borrower fails to make timely payments. Banks may restructure the loan or take possession of the security to recover the outstanding amount.

• Bad Debts in the Corporate Sector: Large corporations may take loans from banks for various purposes. If the corporation fails to repay the loan, it becomes a non-performing asset for the bank.

NPA Classification Categories

1. Standard Assets: NPAs due for 90 days to 12 months. They are considered to have normal risk levels and are the least severe category of NPAs.

2. Sub-Standard Assets: NPAs due for more than 12 months. They pose a higher risk compared to standard assets and are assigned a market value reduction by banks and financial institutions.

3. Doubtful Debts: NPAs remaining due for a minimum of 18 months. Lenders doubt the ability of such borrowers to repay their debts.

4. Loss Assets: NPAs with extended periods where lenders have given up hope of recovering their money. The losses are then forcefully recorded as a write-off on their balance sheets.

Factors Leading to Non-Performing Assets

1. Inadequate Lending Practices:

   • Lending to individuals or businesses with poor credit ratings.
   • Lack of proper investigation or follow-up on payments.

2. Corruption and Political Pressure:

   • Corruption in financial institutions, particularly in public sector banks.
   • Political influences pushing banks to lend to struggling sectors.

3. Economic Recession:

   • Decreased revenue and profitability during economic downturns.
   • Companies unable to meet their loan obligations.

What Happens to Non-Performing Assets?

When a loan becomes a non-performing asset, lenders have two recovery options:

• Pledged Assets: Lenders may pursue legal action to liquidate the assets and recover their investment.

• Unsecured Loans: Lenders may classify the loan as bad debt and write it off. Alternatively, they can transfer the NPA account to a collection agency at a discounted rate, recovering part of the investment.

Bad Loans, Good Times? The Curious Case of India's NPA Rise

In 2005, Vijay Mallya, the owner of The Kingfisher Airlines Ltd, expanded the airline's operations, making it the second-largest in India. However, a determined Mallya sought to further expand Kingfisher’s reach by acquiring international airlines. In 2007, KFA purchased the struggling Air Deccan and rebranded it as Kingfisher Red. Unfortunately, both airlines started bearing losses, leading 17 banks, mostly PSUs, and some private banks like ICICI and HDFC, to provide KFA with loans worth ₹6,900 crores. Eventually, in the year 2010, Kingfisher Airlines became a non-performing asset for banks.

The Kingfisher Airlines Ltd case serves as a cautionary tale for banks, governments, and legal systems.

Preventive Measures

1. Rigorous Credit Risk Assessment:

   • Scan credit ratings from the Credit Information Bureau India Limited.
   • Evaluate loan applications thoroughly.

2. Timely Reminders and Settlements:

   • Remind borrowers for payments promptly.
   • Offer payment plans to regularize loan accounts.

3. Alternative Dispute Resolution:

   • Utilize Lok Adalats and Debt Recovery Tribunals for quick settlements.

4. Strict Measures and Professional Aid:

   • Engage professional asset reconstruction companies.
   • Circulate defaulters' details to deter future lending.

5. Insolvency and Bankruptcy Policies:

   • Aid distressed borrowers with structured solutions.
   • Prevent borrowers from diverting funds to other subsidiaries or startups.

Prevention Is Better Than Cure

Proactive approaches to credit risk assessment, loan recovery, and debt restructuring can help lenders avoid potential losses and ensure a strong financial system. Effective management of non-performing assets is crucial for financial stability and economic growth.

Understanding NPAs is crucial, as they pose significant risks. By keeping an eye on their prevalence and types, we can better assess the health of institutions and identify potential financial storms developing ahead.

“NPAs are ticking time bombs disguised as bad debt”