NPA Crisis: Problem and Solution

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As the recent news and events repeatedly point out, NPAs have become the most important and unsolvable issue for Indian banks.

But how it impacts?

• As the NPA of the banks will rise, it will bring a scarcity of funds in the Indian security markets. Few banks will be willing to lend if they are not sure of the recovery of their money.
• The shareholders of the banks will lose a lot of money as banks themselves will find it tough to survive in the market.
• This will lead to a crisis of confidence in the market. The price of loans, i.e. the interest rates will shoot up badly. The shooting of interest rates will directly impact the investors who wish to take loans for setting up infrastructural, industrial projects etc.
• It will also impact the retail consumers like us, who will have to shell out a higher interest rate for a loan.
• All of this will lead to a situation of low off-take of funds from the security market. This will hurt the overall demand in the Indian economy. And, finally, it will lead to lower growth rates and of course higher inflation because of the higher cost of capital.
• This trend may continue in a vicious circle and deepen the crisis.
• Total NPAs have touched figures close to the size of UP budget. Imagine if all the NPA was recovered, how well it can augur for the Indian economy.

What can be the solutions?

• Banks need to be more conservative in granting loans to sectors that have traditionally found to be contributors in NPAs.
• The credit sanctioning process of banks needs to go much more beyond the traditional analysis of financial statements and analyzing the history of promoters.
• Instead of sitting and waiting for a loan to turn to a bad loan, and then restructure it, the banks may officially start to work to recover such a loan.
• Contrary to popular perceptions, the NPA in the non-corporate sector is less than that in the corporate sector. Hence, there is a need to reach out to people in remote areas lacking connectivity and accessibility.