10.
Explanation
NPA stands for Non-Performing Asset. It’s a financial term used in the banking and financial industry. An NPA refers to a loan or advance that has not been serviced by the borrower with regard to interest and/or principal repayment for a specified period, typically 90 days. In other words, it’s a loan that is in default or has stopped generating income for the lender. Banks and financial institutions closely monitor NPAs as they can impact their financial health and profitability.
According to the reports, Gross NPAs stood at 3.9 per cent in FY 2023, down from a high of 11.5 per cent in 2018. The period also saw gross advances grow from Rs 83.6 lakh crore in 2018 to Rs 135 lakh crore in 2023. Therefore, the decrease in the percentage of Gross NPAs in relation to the increased base of advances may not tell the full story. Nonetheless, the decline in the Gross NPA percentage is a turnaround of sorts
Here are some ways in which the NPA situation can affect India’s financial condition:
1. Banking Sector Stability : High levels of NPAs can weaken the stability of banks and financial institutions. When banks have a significant portion of their assets tied up in non-performing loans, they may need to set aside substantial provisions, which can impact their profitability and capital adequacy.
2. Credit Availability: Banks burdened with a high level of NPAs tend to become risk-averse and may reduce their lending activities, especially to businesses and individuals. This can result in a credit squeeze, making it difficult for businesses to access funds for expansion and working capital.
3. Government Finances : The government may need to infuse capital into public sector banks to maintain their capital adequacy ratios. This capital infusion can impact the government’s fiscal position and may lead to increased borrowing, which could affect fiscal deficits.
4. Investor Confidence: A high level of NPAs can erode investor confidence in the banking sector and the broader financial system. This can affect foreign investment and the overall stability of financial markets.
5. Economic Growth: The banking sector’s ability to support economic growth is hindered when it is dealing with a high level of NPAs. A lack of credit availability can impede business expansion and, in turn, slow down economic growth.
6. Regulatory Measures: The Reserve Bank of India and the government have introduced various regulatory and resolution mechanisms, such as the Insolvency and Bankruptcy Code (IBC), to address NPAs. These measures can impact the financial condition by facilitating the resolution and recovery of bad loans.