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The banks at this time took to the practice of ‘evergreening’, where fresh loans were given to some promoters to enable them to pay off their interest.This effectively pushed the recognition of these loans as non-performing to a later date, but did not address the root causes of their unprofitability.
About 85% of these NPAs are from loans and advances of public sector banks.
For instance, NPAs in the State Bank of India are worth Rs 2.23 lakh crore.
This contributed to what is now known as India’s Twin Balance Sheet problem, where both the banking sector (that gives loans) and the corporate sector (that takes and has to repay these loans) have come under financial stress.
When the project for which the loan was taken started underperforming, borrowers lost their capability of paying back the bank.
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.So, an asset which was supposed to generate income for the bank has stopped not only generating additional income but also its principal amount.India ranked at 5th position among the countries with highest NPA – With 9.9 percent ratio India has the highest level of non-performing assets (NPA) among BRICS countries and is ranked fifth on a list of countries with the highest levels of NPAs, a report by CARE Ratings revealed.The bad loan crisis at Indian state-owned banks continues to worsen.According to RBI, “The overall gross NPAs in the system has grown to 10.2% as the Sep 2017 which was the level predicted for March 2018 in the previous Financial Stability Report (FSR) from 9.6% six months earlier”.In the last few years, gross NPAs of banks (as a percentage of total loans) have increased from 2.3% of total loans in 2008 to 9.3% in 2017 (Figure 1).This indicates that an increasing proportion of a bank’s assets have ceased to generate income for the bank, lowering the bank’s profitability and its ability to grant further credit.The Government needs to speed up the recovery process of loans and need to reduce the mandatory lending to priority sector as it one of the major contributor to bank’s NPA.The issue of Non-Performing Assets (NPAs) in the Indian banking sector has become the subject of much discussion and scrutiny.Further, recently there have also been frauds of high magnitude that have contributed to rising NPAs.Although the size of frauds relative to the total volume of NPAs is relatively small, these frauds have been increasing, and there have been no instances of high profile fraudsters being penalised.