Punja National Bank

The FSR (Financial Stability Report) of RBI December 2017 points out the alarming figures of Bank NPAs.   The statistics reveals the figures as under:

  1. Gross Non Performing Advances (GNPA) ratio of scheduled commercial banks (SCBs) increased from 9.6% to 10.2% between March and September 2017.
  2. The GNPA grew by 18.5% on a year on year basis in September 2017.
  3. The GNPA of PSU banks stood at 13.5% in September 2017 and the figure of Private Banks was 3.8%

Reasons for Increase in NPAs:

  1. Firstly majority of the projects were sanctioned during the economic boom which however reversed its position. Expectations from both Banks and the Corporate sector was that it would be a win win position for both, which however did not happen.  Many Infrastructure projects failed due to policy decision, economic crisis, regulatory issues like environmental clearances and corruption, pending court cases,  which failed to generate the expected cash flow as expected and corporates thereby failed to repay their loans resulting in raising NPAs.
  2. Capitalism was another factor responsible for the increased NPAs. Political interference resulted in mounting underserving loans.  To quote in a Moral Hazard, the politically influential corporates know that even if they do not repay their dues,  banks would be recapitalized by the Government through public money paid by way of taxes and thus would get the expected shelter.   This will obviously result in wilful defaulters from Corporate sectors.
  3. Credit appraisal and monitoring of loans from the banks’ angle is very poor and can be said to be far below the standards set. Timely supervision and architectural errors of RBI’s monitoring of Banks’ credit portfolios is also another factor responsible for the increased NPAs.

Negative effects of NPA on Economy:

There are several negative factors which has had a direct effect on the economy.

  1. A raise in NPA figures obviously has its cascading effects on the interest rates charged by the Scheduled Commercial Banks. The interest rate charged by banks consists of
    1. Policy Rate (Repo Rate)
    2. Default Risk Premium
    3. Banks’ compensation for costs incurred

    Precisely we can say that if a Rate of interest charged by a bank is 16%, its break up can be shown as – 6% towards policy rate and the other 10 percent will be due to other factors. This 10% is independent of the monetary policy and depends on other factors and monetary policy has nothing to do with this. The Default risk premium is a factor decided by the banks keeping in mind the risk factor involved in the credit area related to the concerned sector to which lending is made.

  2. RBI itself has committed in its monetary policy report that huge NPAs would obviously weaken the monetary policy transmission mechanism. To quote it better, between January and October 2015, RBI reduced the Repo rate by 125 basis points but the Banks passed on only 50 Basis points to the ultimate borrowers, whereas the deposit rate was reduced by 130 BPS resulting in a rise in the interest margin, which was one of the highest in the world. Banks thus make use of the policy rates to their advantages both at the Deposits and Advances portfolio.   Further, banks’ lending rates move closely and faster with response to monetary policy tightening than to loosening.
  3. Another reason attributed is the high level NPAs at Banks, puts a break on their efforts to pass on the fully benefit of a relaxation in the monetary policies. Precisely we can say that Repo rate cuts are used by banks a tool to recover their loss.
  4. Another important notable factor is reduction in Private Investments.   Investments drop as interest rates go up.   Increase in interest rates will not greatly affect Corporate’s investments.  A slow credit growth is attributed mainly to the stress in PSBs.   The PSBs go for a cautious approach and are risk averse to more lending.  Expecting a correction in lending policies, banks have become more cautious in sanctioning new loans.  With a thinking that with the reduced economic growth business men may not be able to pay their dues, they go for this approach.  However, from the businessmen’s angle, a cut in credit moreso during economic crisis, brings down their business growth, which inturn results in low profit and default in repayment of bank dues
  5. Next point to be noted is market value. At Rs. 4 lakh crore bad loans which exceeds the market value of PSBs, by 1.5 times, a scare is already brought in the minds of the investors.  The bank stocks and share value in the market have started coming down which is a big blow for the retail investors.  Possibly a timely intervention by RBI and the Government has averted the crisis.  The Government has now come forward to recapitalize the PSBs, to boost public confidence.
  6. Rating agencies have started to downgrade the ratings of banks, which in turn will affect their ability to raise capital from the market. Retail investors have to face double blow, one they lose money as share prices fall and they have to pay tax for recapitalising the banks.


  • It is felt that in order to bring a full stop to the NPA menace banks must be given full autonomy
  • Evaluation, monitoring and repayment of Loans can be improved through better corporate governance and decentralisation.
  • The insolvency and bankruptcy code mooted tries to bring a full stop for political intervention in banks’ lending. This route must be further tightened.


Unless RBI and Government bring stringent policies and measures, revival of banks and escaping from the NPA crisis is a big challenge in the days to come.

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