Non performing assets are the loans of the banking system of which the payment of principal or interest is overdue for 90 days. It is categorised into 3 types by RBI
Substandard NPAs- Loan repayment or interest payment overdue for 1 year.
Doubtful NPAs- Loans that remained in the substandard category for a period of 12 months
Loss assets- They 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.
Why NPAs are formed?
This is due to lingering legal action, charging high rate of interest along with low recovery rate at present it is 52% only because of Insolvency and Bankruptcy code and failed habit of saving by banks.
In India, MSEs or Midsize enterprise are deprived of loans as stock market and banks prefer to lend to large firms instead of them. But we should acknowledge the fact that the share of MSEs is higher in exports of the country but it has been in tailspin due to asking the global currency market for the loans instead of the domestic market because domestic market don't provide them with it. Both equity market and Banking system of India prefer large firms over MSEs. Also they charge high rate of interest on the loans offered that MSEs are forced to depend upon global market. This leads to currency crisis at times which decrease the revenue of these firms thereby even if they try to increase there share in exports the effect becomes negligible.
In order to overcome this, Gourishankar S Hiremath suggests the use of Capital bond market where securities are issued by the government. He believes that these markets will help MSEs to get domestic help at low rates of interest which will reduce the defaulter rate thereby causing a decline in NPAs. Also he suggests the enforcement of IBC on both banking system and capital bond market. IBC is an insolvency and Bankruptcy code which enables the lender to use the personal assets of the debtors in case he fails to repay the loan back. This will increase the confidence of banks in MSEs and they can get domestic help which will in turn increase the exports of the country. The economy by the incoming of Capital bond Market in greater play will be insulated by the triple crisis i.e debt, banking and currency crisis. This will also reduce the NPAs in the economy and an improved assessment of same.
