News Highlights
The National Asset Reconstruction Company Ltd. (NARCL), set up to take over large bad loans of more than ₹500 crore from banks, will pick up the first set of such Non Performing Asset (NPAs) in July
Non Performing Asset
- A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.
- The non performing asset is, therefore, not yielding any income to the lender in the form of interest payments.
- NPAs can be classified as a substandard asset, doubtful asset, or loss asset, depending on the length of time overdue and probability of repayment.
Significance of NPAs
- For the borrower
- if the asset is non-performing and interest payments are not made, it can negatively affect their credit and growth possibilities.
- It will then hamper their ability to obtain future borrowing.
- For the bank or lender
- Interest earned on loans acts as a main source of income.
- Therefore, non-performing assets will negatively affect their ability to generate adequate income and thus, their overall profitability.
- To maintain a profit margin, banks will be forced to increase interest rates.
- Due to the curb in further investments, it may lead to the rise of unemployment
Measures to control Non-Performing Asset (NPA) – Government of India and RBI
- Debt Recovery Tribunal (DRT)
- It was set up to reduce the time required for settling cases
- Governed by Recovery of Debt due to Banks and Financial Institutions Act, 1993
- Insufficient numbers, hence cases are pending for longer durations.
- Credit Information Bureau
- This step is to prevent NPA’s by sharing of information on wilful defaulters
- ARC (Asset Reconstruction Companies)
- Recovering value from stressed loans bypassing courts which was a time-consuming process.
- Corporate Debt Restructuring
- Reduce the burden of debts on the company by giving more time to the company to payback as well as decreasing the rates along with it
- Joint Lenders Forum
- It is done to avoid a situation where a loan is taken from one bank to repay the loans in other banks
- Mission Indradhanush
- It is the most comprehensive reforms undertaken to improve the functioning of the Public Sector Banks, by using the ABCDEFG formula.
- Strategic Debt Restructuring (SDR)
- Corporates who have taken loans from banks if they are unable to repay, then the banks can convert part or complete loans into equity shares
- Asset Quality Review
- This is a kind of preventive measure, involving early identification of assets which could turn out to be stressed at a later stage.
- Insolvency and Bankruptcy Code
- One-stop process for solving insolvencies.
- Aims to protect small investors.
The Bad Bank: National Asset Reconstruction Company Ltd. (NARCL)
- NARCL has been incorporated under the Companies Act and has applied to Reserve Bank of India for license as an Asset Reconstruction Company (ARC).
- NARCL has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution. PSBs will maintain51% ownership inNARCL
- Why NARCL when there are 28 existing Asset Reconstruction Companies?
- Existing ARCs have been helpful in resolution of stressed assets especially for smaller value loans.
- Various available resolution mechanisms, including IBC have proved to be useful.
- However,considering the large stock of legacy NPAs, additional options/alternatives are needed and the NARCL structure announced in the Union Budget is this initiative.
- What they Do?
- NARCL is intended to resolve stressed loan assets above ₹500 crore each amounting to about ₹ 2 lakh crore.
- In phase I, fully provisioned assets of about Rs. 90,000 crores are expected to be transferred to NARCL, while the remaining assets with lower provisions would be transferred in phase II
Pic Courtesy: Pixabay
Content Source: The Hindu