Answer to Question #183905 in Macroeconomics for Vanshaj Parashari

Question

In India, the total NPA in 2020 of the banks amounts to ~17 lakhs crores, an increase from ~3 lakh crores in 2013 and negligible amount in 2007, according to Database on Indian Economy by RBI. Such large non-performing assets (NPA) of the banks have declined the assets of the public sector banks considerably since 2007-08. We know that when asset of the banks decline, the risk in the financial sector increase considerably. Moreover, despite substantial cut in policy interest rate by the RBI, commercial banks are reluctant to extend credit. 

Answer 1

The issue of Non-Performing Assets (NPAs) in the Indian banking sector has become the subject of much discussion and scrutiny.

Escalating NPAs require a bank to make higher provisions for losses in their books. The banks set aside more funds to pay for anticipated future losses; and this, along with several structural issues, leads to low profitability. Profitability of a bank is measured by its Return on Assets (RoA), which is the ratio of the bank’s net profits to its net assets.

The measures taken to resolve and prevent NPAs can broadly be classified into two kinds – first, regulatory means of resolving NPAs per various laws (like the Insolvency and Bankruptcy Code), and second, remedial measures for banks prescribed and regulated by the RBI for internal restructuring of stressed assets.