Non performance assets (NPA), FINANCIAL INSTITUTIONS

All about NON PERFORMANCE ASSETS (NPA) , the types, the stages, current scenario, measures , impact and aftermath and many more things included related to non performance assets.

1. MANAGEMENT OF FINANCIAL INSTITUTIONS PRESENTATION TOPIC: “NPA (NON PERFORMING ASSETS)” PRESENTER: SAHIL SINDHANY MBA-II, 3 RD SEMESTER 23421041

2. TODAY’S AGENDA WHAT IS NPA? WHAT ARE THE TYPES OF NPA? WHAT ARE THE STAGES OF NPA? WHAT IS THE IMPACT OF NPA? REASONS FOR NPA? MANAGEMENT AND RECOVERY OF NPA? MEASURES TO REDUCE NPA? WHAT IS THE CURRENT NEWS ABOUT NPA?

3. NON PERFORMING ASSETS 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. An asset becomes non-performing when it ceases to generate income for the bank. Typically, an asset is classified as an NPA when the borrower fails to make interest or principal payments for a period of 90 days or more. Significance: Indicator of the financial health of banks. Impacts profitability and lending capacity.

4. EXAMPLES OF NPA Corporate Loans: A manufacturing company defaults on a major loan due to downturns in the economy or mismanagement. This leads to a significant NPA. Agricultural Loans: A farmer is unable to repay his loan due to crop failure, resulting in the loan becoming an NPA. Microfinance Loans: Small entrepreneurs or individuals unable to manage their micro-loans due to business failure or lack of income.

5. Categories of Non-Performing Assets (NPAs) NPAs are classified into different categories based on the duration they have been in default. This classification helps in understanding the severity of the default. Substandard Assets: Loans that are overdue for less than 12 months. These represent early signs of financial difficulty faced by the borrower. Doubtful Assets: Loans that have remained in the substandard category for 12 months. These pose a higher risk as the probability of recovery decreases over time. Loss Assets: Loans that are identified by the bank or internal/external auditors as uncollectible and of such little value that they need to be written off.

6. INDIA’S NPA ISSUE

7. POSSIBLE CAUSES OF NPA Several factors contribute to the rise of NPAs. It can range from macroeconomic conditions to specific operational and governance issues within banks and borrowing organizations. Economic Slowdown: Reduced economic activity leads to lower revenue and higher defaults. Poor Lending Practices: Inadequate due diligence, pressure to meet lending targets, and political interference can lead to poorly vetted loans. Fraudulent Activities: Misappropriation of funds and fraudulent practices by borrowers lead to non-repayment. Sector-Specific Issues: Industries like infrastructure face long gestation periods and regulatory hurdles, contributing to defaults. Delay in Projects: Cost overruns and delays in project completion increase the financial stress on borrowers.

8. IMPACT OF NPA High levels of NPAs have a multi-faceted impact on the economy, the banking sector, and financial stability. Bank Profitability: NPAs require provisioning, reducing the profits and capital available for future lending. Credit Crunch: High NPAs limit the bank's ability to provide new loans, leading to a slowdown in credit growth. Higher Interest Rates: To compensate for their losses, banks may increase interest rates on loans. Investor Confidence: High NPAs affect investor confidence and the valuation of banks on stock markets. Economic Slowdown: Reduced credit flow hampers economic growth and development activities.

9. Steps Taken by RBI to Tackle NPAs The Reserve Bank of India (RBI) has implemented a diverse array of measures to address the Non-Performing Asset (NPA) crisis. These measures span regulatory frameworks, technological integration, and sector-specific strategies aimed at both immediate relief and long-term structural reforms:

10. HOW TO TAKLE WITH NPAs To tackle the NPA issue effectively, a multi-pronged strategy that involves policy measures, systemic reforms, and rigorous implementation is required. Strengthening Credit Appraisal: Enhancing due diligence and risk assessment practices before loan approval. Improving Governance: Reducing political interference and ensuring professional management in PSBs. Technological Integration: Using data analytics and AI for better monitoring and early detection of stress in loans. Strengthening Legal Framework: Making insolvency and debt recovery processes more efficient and quicker. Capacity Building: Training bank personnel in risk management and loan monitoring.

11. CURRENT NEWS RELATED TO NPAs As of September 2024, India's banking sector continues to show significant improvement in managing Non-Performing Assets (NPAs). The Reserve Bank of India (RBI) reports that the Gross NPA (GNPA) ratio is expected to drop to 2.5% by FY25, a 12-year low. This decline is largely due to consistent reductions in new NPA accretions and increased write-offs, particularly by state-run banks. In the past fiscal year, net NPAs for public sector banks dropped significantly, and the overall GNPA stock across all bank groups decreased. This trend reflects ongoing efforts by banks to clean up their balance sheets and improve asset quality through mechanisms like recoveries, upgradations, and the Insolvency and Bankruptcy Code (IBC). However, the RBI's stress tests indicate that under severe economic stress, the GNPA ratio could rise slightly, especially for public sector banks. Despite these potential risks, the overall outlook remains positive, with the banking sector well-capitalized to absorb any macroeconomic shocks ​ The New Indian Express , FortuneIndia , Business Finance News

12. CONCLUSION Addressing the NPA issue is critical for the stability and growth of the Indian economy. Effective management of NPAs requires continuous monitoring, robust credit appraisal, appropriate policy frameworks, and strong legal mechanisms. The steps taken by the RBI and the government are significant progress toward resolving the NPA crisis. However, sustained efforts are necessary to prevent its recurrence and ensure a resilient banking sector.

13. Some M otivational Quotes "Every NPA is not just a challenge but an opportunity to innovate, reform, and strengthen the foundations of financial discipline." "Turning around an NPA isn't just about recovery; it's about redefining success through perseverance and strategic action." "In the face of NPAs, let resilience be your strategy, and determination be your guide." "NPAs are not the end of the road but a detour that leads to stronger, more resilient financial practices." "The true test of a financial institution is not in the absence of NPAs but in how it turns them into opportunities for growth and renewal."