Economics for Everyone: Nuances of Non-Performing Assets (NPA) in the Indian banking sector

Non-performing assets are one of the major concerns for banks in India. NPAs reflect the performance of banks.

May 29, 2019 10:05 IST Universal Business School Prof. M. Guruprasad |

Professor Sen as usual was preparing for his lectures when Kumar entered his cabin. Kumar was one of those studious, curious, committed students in the class. Kumar and some of his classmates regularly visit the Professors cabin and discuss matters relating to Economy, Policy and issues related to current affairs. Kumar was accompanied by some of his friends     
 
Yes, Kumar tell me what is the question you have today said the Professor with a smile. Sir, i find you reading and immersed in your thought process for long time, what is it bothering you, asked Kumar.
 
You are right answered the Professor; I was thinking about this bloating NPA problem in India. Sir, can you throw some light on it asked Raj. Kumar requested professor to discuss the issue in the subsequent class room session. The Professor happily agreed.
 
Next day, the students were eagerly waiting in the class, Prof. Sen started explaining the issue of NPA in India.
 
A strong banking sector is important for flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. Non-performing assets are one of the major concerns for banks in India. NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. The NPA growth involves the necessity of provisions, which reduces the overall profits and shareholders’ value. The problem of NPAs is not only affecting the banks but also the whole economy. In fact level of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade. This arises when the lending business of banking also carries a risk called credit risk, which arises from the failure of borrower.
 
The students were listening carefully, the Prof.continued
 
NPA are those loans given by banks or financial institutions which borrowers default in making payment of principal amount or interest.   When a bank is not able to recover the loan given or not getting regular interest on such loan, the flow of funds in banking industry is affected. Also the earning capacity is adversely affected. This has direct and immediate impact on bank profitability and efficiency.
 
Sir how do we define these NPA’s asked a student
 
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. Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
 
  1. Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
  2. Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
  3. Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”
 
According to reports, NPAs in the Indian public sector banks (PSBs) increased by about Rs 6.2 lakh crore between March 2015 and March 2018.
 
But how did this happen asked Lata, another student
 
The ever increasing NPAs of Indian Banking industry arises due to many reasons. Some of the reasons are faulty credit management like defective credit in recovery mechanism, lack of professionalism in workforce, improper selection of Borrowers/activities and misutilisation of loans by the users. Untimely communication to the borrowers regarding their due date and lack of proper legal mechanism, weak credit appraisal system, industrial problems and recession in market etc also causes NPAs to rise in the banking industry, answered the professor.
 
So this is the mistake by the bankers said Raju. No Raju said the professor, Banks by their virtue of their very business are in the business of lending which has many elements of risk. This is normal. These lending could be as per the directives of Government of India, classified as priority sector lending or could be big commercial finances like some of the recent cases. The big and influential business magnets have swallowed thousands of crores of banking system and run away. When this goes beyond a limit with no proper judgement this results in problem. 
 
But sir asked Kumar, where is this limit. Good question Kumar, replied the Professor,  that would require a detailed understanding of the various financial indicators of the specific bank and the overall economic conditions prevailing in the economy.
 
Sir, how do we judge the intensity of this NPAs asked Raghav, another student?
 
Typically, Reserve Bank of India (RBI) check bank books every year as part of its annual financial inspection (AFI) process. However, a special inspection was conducted in 2015-16 in the August-November period. This was named as Asset Quality Review (AQR). In a routine AFI, a small sample of loans is inspected to check if asset classification was in line with the loan repayment and if banks have made provisions adequately. However, in the AQR, the sample size was much bigger and in fact, most of the large borrower accounts were inspected to check if classification was in line with prudential norms. Some reports suggest that a list of close to 200 accounts was identified, which the banks were asked to treat as non-performing. Banks were given two quarters, October-December and January-March of 2016 to complete the asset classification.
 
The RBI believed that asset classification was not being done properly and that banks were resorting to ever-greening of accounts. Banks were postponing bad-loan classification and deferring the inevitable. The former RBI governor Raghuram Rajan had once said. ‘Band-aids’ would no longer work and banks need deep surgery. Investors were also facing uncertainties as guidance by banks on bad loans was erratic. So finally, Mr. Rajan decided to end the uncertainty as he committed to cleaning up bank balance sheets by March 2017.
 
The AQR created havoc on banks’ profit & loss accounts as many large lenders slipped into losses in both the said quarters, which resulted in some of them reporting losses for the full financial year. Record losses were posted in Q4 of FY16 by many large lenders like Bank of Baroda (Rs.3,230 crore), Punjab National Bank (Rs.5,367 crore), IDBI Bank (Rs.1,376 crore) – to name a few. Almost all public sector banks were impacted, while the impact in the private sector was limited to biggies such as ICICI Bank and Axis Bank. Bad loans in the Indian banking system jumped 80 per cent in FY16, according to RBI data, mainly on account of the AQR.
 
OK, sir I read in the bank reports, the percentage of NPAs has gone down over the years asked Raj. Good reading Raj said the Professor, the percentage of NPA declining over the years but the real issue is that the absolute figures seem to be increasing.
 
Sir, what actions we are doing in this regard asked Kumar.
 
Well, let me explain something on what we call it as the Prompt Corrective Action said the professor.
 
To ensure that banks don't go bust, RBI has put in place some trigger points to assess, monitor, control and take corrective actions on banks which are weak and troubled. The process or mechanism under which such actions are taken is known as Prompt Corrective Action, or PCA.
 
Why do we need this sir?
 
Prompt Corrective Action or PCA is a framework under which banks with weak financial metrics are put under watch by the RBI. The PCA framework deems banks as risky if they slip below certain norms on three parameters — capital ratios, asset quality and profitability. It has three risk threshold levels (1 being the lowest and 3 the highest) based on where a bank stands on these ratios.
 
Why is it important?
 
As most bank activities are funded by deposits which need to be repaid, it is imperative that a bank carries a sufficient amount of capital to continue its activities. PCA is intended to help alert the regulator as well as investors and depositors if a bank is heading for trouble. The idea is to head off problems before they attain crisis proportions. Essentially PCA helps RBI monitor key performance indicators of banks, and taking corrective measures, to restore the financial health of a bank.
 
On breach of any of the risk thresholds mentioned above, the RBI can invoke a corrective action plan. Depending on the threshold levels, the RBI can place restrictions on dividend distribution, branch expansion, and management compensation. Only in an extreme situation, breach of the third threshold, would identify a bank as a likely candidate for resolution through amalgamation, reconstruction or winding up.
 
How do they implement in case of a problem sir?
 
Banks are not allowed to renew or access costly deposits or take steps to increase their fee-based income. Banks will also have to launch a special drive to reduce the stock of NPAs and contain generation of fresh NPAs. They will also not be allowed to enter into new lines of business. RBI will also impose restrictions on the bank on borrowings from interbank market.
 
It is important to mention about the Special Mention Accounts (SMA) here, continued the professor. What is it Sir? asked the students
 
The classification of Special Mention Accounts (SMA) was introduced by the RBI in 2014, to identify those accounts that has the potential to become an NPA/Stressed Asset.  The reason for such a classification is because some accounts may turn NPA soon. Because, an early identification will help to tackle the problem better.          The Special Mention Account identification is an effort for early stress discovery of bank loans. It was introduced as a corrective action plan to contain stress.
 
Sir, we hear that the government will help by doing recapitalisation said Raghav. I think it is Securitisation said Lata. Well, let me explain this confusion said the Professor.
 
First let us know about recapitalisation. Recapitalisation involves infusing of capital by the government into banks.
 
Public sector banks account for major percent of total banking assets in India. The increasing NPA level keeps these Public Sector Banks starved of funds and need for more capital infusion every now and then.
 
The banking sector in India has Rs. 10 lakh crore worth NPAs. PSBs account for the bulk of the non-performing assets (NPAs).
 
   Since the government has a majority stake in Public Sector Banks, it injects capital through the Recapitalization in these banks. Few years back, the Government of India has proposed to infuse 2.11 lakh crores in the Public Sector Banks towards recapitalization. Government proposes to issue Recapitalization bonds, raise equity from the market and make budgetary allocation. The Government had proposed the recapitalisation of banks worth 2.11 lakh crores which is to be done through the following manner
 
Budgetary allocations: Rs. 18000 crores
 
Issue of equity shares by banks in the market: Rs.58000 crores
 
Issue of Recapitalisation bonds by the Government: 1.35 lakh crores
 
Government also proposes to recapitalize the banks if they are ready to implement a series of reforms to get the funds, including improving their due diligence, allowing specialised monitoring for loans above Rs.250 crores, and limiting the number of lenders that can group together to dole out loans.
 
This looks good said a student.  May not be according to critics said the professor.
 
Why sir? Asked Kumar
 
The Professor continued, Impact of recapitalisation could be bad on fiscal deficit of India as it may increase the fiscal deficit gap.  According to some experts, recapitalisation -injection of Rs.2.11 trillion in the banking system could reduce GDP by 0.7% to 1%. According to critics, this is nothing but covering up the large borrowers default and penalising the public. After all, any money infused by the government ultimately originates from tax and other revenues collected from public of the nation. Isn’t? Asked the Professor.
 
Recapitalisation can give some breathing space to the banks for some time. But the need is to correct the rot in the banking sector.
 
The students nodded their head in silence.
 
The Government should follow it up with structural reforms in the banking sector. Well, it is interesting to note that during the economic reforms in the 90’s, the Narasimham committee on Banking sector reforms did recommend about the rise of NPA in the banking system, and there has been lot of initiatives to bring the efficiency in the banking sector.  This has resulted in considerable changes and initiatives in the Banking sector in managing the NPA level.
 
Ok then what is the issue sir asked Kumar.
 
But almost three decades after the reforms the absolute NPA level has gone up by multifold level across the banking system.
 
Then what is the solution sir asked a student.
 
Hence, the government has brought in lot measures through other mechanisms such as Securitisation, SARFESAI Act, and Bankruptcy law and so on. According to the recent reports by the media, the government would come out with EASE (Enhanced Access & Service Excellence) Index for ranking of banks. This would increase public accountability of PSBs as independent agencies would evaluate and rank PSBs annually on reforms.
 
Sir please tell us about Securitisation, asked the curious students
 
Well, let me start with the Securitisation
 
Securitisation is the process of pooling and repackaging of homogenous illiquid financial assets into marketable securities that can be sold to investors. Securitisation has emerged as an important means of financing in recent times.
 
A typical securitisation transaction consists of the following steps:
 
1. Creation of a special purpose vehicle to hold the financial assets underlying the securities;
 
2. Sale of the financial assets by the originator or holder of the assets to the special purpose vehicle, which will hold the assets and realize the assets;
 
3. Issuance of securities by the SPV, to investors, against the financial assets held by it.
 
This process leads to the financial asset being take off the balance sheet of the originator, thereby relieving pressures of capital adequacy, and provides immediate liquidity to the originator.
 
To quote the official definition
 
“The Securitisation and Reconstruction of Financial Assets And Enforcement of Security Interest Ordinance, 2002” (The Act). Its purpose is to promote the setting up of asset reconstruction/securitisation companies to take over the Non Performing Assets (NPA) accumulated with the banks and public financial institutions. The Act provides special powers to lenders and securitisation/ asset reconstruction companies, to enable them to take over of assets of borrowers without first resorting to courts.”
 
The students were attentive and curious. The professor continued further according to the government sources , Securitisation of financial assets is a financial tool for the lenders to securitise their future cash flows from the secured assets and thus to release their funds blocked in them. The secured assets become a market commodity having financial returns on their realisation. This aspect brings in the much-needed expertise in adept handling in realisation of the secured assets. The Act has made an attempt to streamline the legal impediments of normal civil law procedures to foreclose the mortgaged assets by empowering the enforcement of the secured assets by flexible mechanism provided in the Act.
 
Ok said the students. What about SARFESAI Act Sir
 
SARFAESI Act enables and empowers the secured creditors to take possession of their Securities, to deal with them without the intervention of the court and also alternatively to authorize any Securitization or Reconstruction Company to acquire financial assets of any Bank or Financial Institution (FI). The Act has been empowered with the overriding effect over the other legislation and it shall be in addition to and not in derogation of certain legislation. The key objective was to implement the following reforms in the banking system through
 
Efficient or rapid recovery of non-performing assets (NPAs) of the banks and FIs.
 
Allows banks and financial institutions to auction properties (say, commercial/residential) when borrower fail to repay their loans.
 
The amendment to this Act is “an act to regulate securitization and reconstruction of financial assets and enforcement of security interest and to provide for a central database of security interests created on property rights, and for matters connected therewith or incidental thereto.”
 
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 or SARFAESI Act Amendments have been made in 2016 because of “Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016”. “Amendment Act, 2016”), provides for amendment in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”), the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (“RDDBFI Act”), the Indian Stamp Act, 1899 and the Depositories Act, 1996.The rules pertaining to Security Enforcement, Debt Recovery Tribunal (Procedure) Rules, 1993, The Debt Recovery Appellate Tribunal (Procedure) Rules, 1994 have been amended to that effect To DRT (Procedure) Rules, 2016 and DRT Appellate Tribunal (Procedure) Rules, 2016, respectively.
 
What does this means Sir, a student who was slightly terrified with the technical jargon asked Prof.Sen with some hesitation. Prof.Sen, replied with a smile, the act added new definitions to SARFAESI, widened the scope of debts and secured creditors and bestowed upon RBI new powers in relation to making of policies.
 
Sir, what is the issue of farm loans buy Banks. Why this issue has been brought up now. We hear that is the reason for the NPA, asked Raj. No Raj replied the professor.  We cannot say that completely replied the Professor, because, one of the causes of increasing NPA is the farm loans. But according to analysts of NPA data that is not the only major issue. The Professor continued,
 
According to experts, farm loan waivers by state governments provoke heated media debates and thus loom large in public memory, while use of government funds to infuse fresh equity into government-owned banks following large defaults by corporate borrowers goes nearly unnoticed. The scale of the corporate non-performing assets (NPA) problem is of a higher magnitude, and corporate defaults have cost the public exchequer more than farm loan waivers.Acoording to some experts, if recapitalisation of banks is welcomed, a farm loan waiver should be as acceptable. Experts in general are divided on whether farm loan waivers are desirable. According to critics, loan waivers adversely affect the repayment discipline of farmers, leading to a rise in defaults in future. Data show that the percentage of impaired loans in agriculture has been far lower than that in industry.
 
According to reports, the Central government is discussing a scheme to waive outstanding farm loans in the aftermath of widespread farmers’ protests between March and December 2018. Till now, at least 11 States have announced schemes to waive outstanding farm loans: Madhya Pradesh, Uttar Pradesh, Karnataka, Tamil Nadu, Maharashtra, Chhattisgarh, Punjab, Andhra Pradesh, Telangana, Assam and Rajasthan.
 
In the financial year 2017-2018 and to date, 10 state governments have announced farm loan waivers totaling Rs 184,800 crores and the NPA’s of top 12 corporate borrowers was nearly twice, at Rs 345,000 croress. In fact, the total debt of India’s top 10 corporate borrowers alone was nearly four times that amount, at Rs 731,000 crores as of March 2015. According to reports, the total gross bank credit (the amount in loans disbursed to companies or individuals from the banking system) was Rs 71.5 lakh crores as of March 2017, and Rs 77 lakh crores as of March 2018. Of this, agricultural credit was Rs 10 lakh crores for each period, making up a 13-14% share, on average, in overall bank credit. Total credit to industry was at Rs 26-27 lakh crores during each period, amounting to a share of 35% in overall bank credit. Within this, loans to large borrowers--who the RBI defines as receiving loans larger than Rs 5 crores--amounted to Rs 22 lakh crores each year.We need to understand that the  total credit to the top 10 corporate borrowers as of March 2015 was Rs 7 lakh crores, accounting for 10-14% of total bank credit, and 27% of total credit to industry. For the same period, the total credit to agricultural and allied activities was Rs 7.7 lakh crores. In essence, the entire agriculture sector owed the banking system the same amount borrowed by the top 10 Indian corporate borrowers. The Professor Continued, total gross NPAs in Indian banking were Rs 8 lakh crores and Rs 10.3 lakh crores as of March 2017 and March 2018, respectively, according to report.
 
My god, said Kumar, this is mind boggling.
 
The share in NPAs of large borrowers has been increasing over time, with a share in total advances (lending by banks) of 40%, and a share in total stressed assets (including NPAs, restructured loans and assets written-off by banks) of 70% at the end of March 2017.
 
Well, one need to do a thorough research to understand and verify the intensity of the above facts. There could be differences in the magnitude of the problem and but there is now doubt about the directions we are heading said the Professor.
 
Share of Large Borrowers in Total Advances and Indian Banks’ Stressed Assets

Share of Large Borrowers in Total Advances and Indian Banks’ Stressed Assets
 
Sir, with all the initiatives, has there been any initiatives by the banking sector to reduce the NPA’s.
 
Yes said the professor, according to the data, public sector banks saw a 1, 50,960 crores reduction in their NPA levels for the start of financial year 2017-18 till December 31, 2017. Within the 1, 50,960 crores ‘reduction in NPAs’, about 55% or 84,272 crores was due to write-offs. The data shows that out of this only 41,391 crores, l recoveries. In addition, 25,297 crores worth of loans were upgraded from NPA status. However, the data also showed that the same period saw more loans being added to the NPA list, thereby leading to an overall worsening of the NPA situation.
 
In a statement to the Rajya Sabha in May, 2016, the government reported that bad loans to firms accounted for 56% of the NPAs of PSBs. Since the RBI initiated the ‘asset quality review’ at banks, reported NPAs have reached alarming levels. In June, 2016, gross NPAs of listed banks stood at Rs. 6.7 trillion or 9.1% of their advances, a jump from 4.3% of advances in March 2015. This increase is mainly on account of reclassification of corporate loans
 
Sir, what about Bankruptcy law, Raj posted the one remaining topic which was mentioned by the professor. Good Raj, said the professor, I appreciate your listening skills. Well now this is the new development and initiative by the policy makers in India The role of IBC in this is to remove delays in the bankruptcy process. The existing corporate resolution mechanisms have been plagued by delays.
 
India had numerous acts in place to punish the defaulters like the Indian Contract Act, the Recovery of debts due to Banks and Financial Institution Act 1993, the Securitizations and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA).
 
The adjudicating authority will exercise jurisdiction over cases by or against the debtor.
 
The Debt Recovery Tribunal (“DRT”) shall be the adjudicating authority (“Adjudication Authority”) with jurisdiction over individuals and partnership firms other than Limited Liability Partnerships (“LLPs”). Appeals from the order of the DRT will lie to the Debt Recovery Appellate Tribunal (“DRAT”);
 
The National Company Law Tribunal (“NCLT”) shall be the Adjudicating Authority with jurisdiction over companies, other limited liability entities (including LLPs.). Appeals from the order of NCLT shall lie to the National Company Law Appellate Tribunal (“NCLAT”); and NCLAT shall be the appellate authority to hear appeals arising out of the orders passed by the Regulator in respect of insolvency professionals or information utilities.
 
In this context, it is important to know about Lok Adalats. Lok Adalat is one of the Alternative dispute resolution mechanisms in India, it is a forum where cases pending or at pre litigation stage in a court of law are settled. Currently, Lok Adalats organised by civil courts to effect a compromise between disputing parties in matters pending before any court"" can handle cases up to a ceiling of Rs 20 lakh. Banks want to increase the limit to Rs 50 lakh.
 
The proposed bankruptcy legislation seeks to address the issues faced currently in the context of insolvency and winding up. The provisions of the Code are applicable to companies, limited liability entities, firms and individuals (i.e. all entities other than financial service providers).
 
The Insolvency and Bankruptcy Code, 2016 (IBC) is an important reform for India. It is also one that has witnessed one of the fastest legislative and implementation processes. By May 2016, the law was passed by Parliament and received Presidential assent. October and November 2016, saw a lot of action from the government on implementation and finally on 30th November 2016, the sections of the law dealing with the corporate Insolvency Resolution Process (IRP) were notified.
 
For the cases under SICA (Sick Industrial Companies Act) pending at the Board for Industrial and Financial Reconstruction (BIFR) and Appellate, Authority for Industrial and Financial Reconstruction (AAIFR), the Eighth Schedule of IBC explicitly provides for an abatement of the existing cases with an option to re-initiate them as new cases under IBC, within a period of 180 days.
 
The Professor continued, since there are lot of legal aspects to it, there are chances of change or amendments. Recently,         Supreme Court setting aside RBI's 12 February circular gives banks a free hand to explore out-of-court settlements for defaulting firms. For lenders, who were asked by RBI to put in place an early recognition system for bad loans, the decision opens up the possibility of less provisioning requirements as they could drop the tag of non-performing asset (NPA) in the case of some borrowers.
 
Sir, as I understand by your statement that there are differing cases of NPA under the IBC, said Raj.
 
Yes Raj, replied the professor because corporate NPA cases are of three types in general and thus according to the specific intensity of NPA and corrective action requirements.
 
Ok sir, said Raj.
 
Also, there are many practical challenges like judging the collateral quality and ensuring transparency between the lender and borrower.
 
Please explains asked Lata.
 
The professor continued, the major issue in terms of Collateral quality is the impact of Effect of improperly valued and illiquid collaterals, one of the key reasons in the market.
 
Sir, can you explain it asked the students.
 
Well, illiquid collaterals represent, an asset that is difficult to sell because of its expense, lack of interested buyers, or some other reason. Examples of illiquid assets include real estate, stocks with low trading volume, or collectibles. Illiquid assets still have value and, in many cases, very high value, but are simply difficult to sell. This leads to what bankers call as Slippage.
 
Slippage refers to the difference between the expected price of a trade and the price at which the trade is executed. Slippage can occur at any time but is most prevalent during periods of higher volatility when market orders are used
 
Ok said the students.
 
Sir what is the issue of transparency asked Kumar.
 
Well, you might have read the recent news that the .RBI may tighten rules to discourage standstill agreements between firms and lenders.
 
What does this mean sir asked Raj?
 
A standstill agreement can also exist between a lender and borrower in which the lender stops demanding a scheduled payment of interest or principal on a loan in order to give the borrower time to restructure its liabilities.
 
In the banking sector, a standstill agreement between a lender and borrower halts the contractual repayment schedule for a distressed borrower and forces certain actions that the borrower must undertake. A new deal is negotiated during the standstill period that usually alters the loan's original repayment schedule. This is used as an alternative to bankruptcy or foreclosure when the borrower can't repay the loan. The standstill agreement allows the lender to salvage some value from the loan. In a foreclosure, the lender may receive nothing. By working with the borrower, the lender can improve its chances of getting repaid a portion of the outstanding debt.
 
According to reports, the RBI was closely monitoring the situation and, if necessary, would tighten norms to dissuade lenders from entering into such agreements with companies.
 
Why sir? Asked the students
 
Because, this can lead to ‘ever greening’ of loans. Means asked the students
 
An evergreen loan is a loan that does not require the principal amount to be paid off within a specified period of time. Evergreen loans are usually in the form of a line of credit that is continuously paid down, leaving the borrower with available funds for credit purchases. Evergreen loans may also be known as “standing” or “revolving” loans.
 
The professor continued, for all technical purpose the standstill agreement and the evergreen loans were created to provide flexibility to the borrower. But the chances of misuse is high and hence lacks transparency.
 
For example, in one of the recent issue related one of the leading banks in India, has now been accused by a whistle blower of ever greening loans and deploying other strategies to avert impairment in asset quality.
 
According to reports, a whistleblower's complaint has claimed that the bank issued hundreds of letters of credit (LCs) to entities related to its troubled corporate borrowers to help them avoid loan default. A letter of credit is a guarantee that the bank provides to a seller that the bank will cover a payment if the buyer defaults. Thus, it avoided having to set aside higher provisioning for non-performing assets (NPAs).Thus, technically, ever greening refers to the practice of "managing" the balance sheet through means, which may not be violating banking laws in letter, but breaching them in spirit.
 
Ok, said the students.
 
This results in what economists call as bankers or regulators end up in Adverse selection and hence take a Haircut. This also results in Moral Hazard.
 
Hence you see so many defaults.
 
Means Sir asked, Kumar with curiously
 
Adverse selection refers generally to a situation in which sellers have information that buyers do not have, or vice versa, about some aspect of product quality - in other words, it is a case where asymmetric information is exploited. Asymmetric information, also called information failure, happens when one party to a transaction has greater material knowledge than the other party. Typically, the more knowledgeable party is the seller. Symmetric information is when both parties have equal knowledge.
 
A haircut is the lower-than-market-value placed on an asset when it is being used as collateral for a loan. The size of the haircut is largely based on the risk of the underlying asset. Riskier assets receive larger haircuts.
 
Moral hazard and adverse selection are two terms used to describe situations where one party is at a disadvantage. Moral hazard occurs when there is asymmetric information between two parties and a change in the behaviour of one party after a deal is struck. Adverse selection occurs when there's a lack of symmetric information prior to a deal between a buyer and a seller.
 
But sir how any common man understand so many interconnected concepts asked Kumar.
 
Well, it could be a problem even with educated and the professionals and hence we need to educated them this issue.Infact economic literacy is of prime importance for even the common man to understand.
 
Well, let me continue, to simplify and answer Kumar’s question, I essence here the problem is one, it is NPA, the approaches according to the intensity of the problem are at multi level say for example at present for Indian banks there are three legal options or channels which are available for the purpose of NPA’s which is the SARFAESI Act, Debt Recovery Tribunals (DRT) and Lok Adalats.
 
The announcement of the SARFAESI Act has been a reform in the Indian banking sector. This act has grown progressively which can be seen with the decrease in the non-performing assets.
 
According to reports, with 21, 52,895 cases having NPA value of Rs 105,800 crores, Lok Adalats managed to recover mere Rs 3,800 crores in FY17, while SARFAESI Act managed to recover Rs 7,800 crore from 80,076 accounts having NPA value at Rs 113,100 crores. At debt Recovery Tribunal, where 28,902 accounts having NPA value at Rs 67,100 crore, only Rs 16,400 crore was recovered.
 
And these approaches are supported by enactment of bills such as IBC, institutional support which emerge from them such as NCLT, DRT, and SICA and supported by processes such as Securitisations, Recapitalisations and initiatives such as PCA, SMA. Keep reading for a while keeping this in mind the problem, the process, the progress and the probable solution for NPA  will be clear said the professor..
 
Well, the Professor continued, even as the time taken for resolution under the Insolvency and Bankruptcy Code (IBC) continues to exceed the outer limit prescribed under the law, the process is resulting in  better outcomes in a shorter time frame. In FY19, financial institutions recovered close to Rs 70,000 crore through resolution under the IBC, according to reports. This works out to a recovery rate of 43 per cent. In comparison, recoveries under the preceding regime through various channels — debt recovery tribunals, securitisation and reconstruction of financial assets, and enforcement of the securities interest act (SARFAESI) and Lok Adalats — stood at Rs 35,000 crore in FY18. 
 
In sum, unimpressive asset quality is a matter of great concern to not only the lenders but also all concerned including the people at large in the society. The structural problems in both the agricultural and corporate sector must be addressed with equal urgency. Sympathising with the corporate sector for its problem while blaming the overall banking and farm sector for its alleged fault is a myopic view. High level of NPA implies scarce resources of the bank get blocked, restricting the recycling of funds in the productive sectors of the economy. Once the credit to various sectors of the economy slows down, the economy is affected. Moreover mounting menace of NPA raises the cost of credit, makes banks more averse to credit risk and as a result, genuine small and medium entrepreneurs are denied of credit, which unfortunately, throttle their enterprising spirits as well. Economic history indicates that many banks in the world had to close down due to high level of NPA.
 
The unbearable level of NPAs has led to lower interest income and loan loss provisioning requirements which have destroyed the profitability of the banks to great extent. Besides the recycling of funds is restricted, thus leading to serious asset liability mismatches. The supply of credit to potential borrowers have been blocked which is having a harmful effect on the capital formation and hampering the economic activity of the country. So the NPA problem is an issue of public debate and of national priority.
 
Thank you sir. Said the students.
 
Prof.M.Guruprasad, Director Research, UNIVERSAL BUSINESS SCHOOL

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