NPA Crisis: Reforms the Way Forward for Banking Sector in India

NPA taking a toll on banking sector in India and reforms the only way to tackle the crisis. Despite several measures taken by the government, the banks strain continues. 

NPA Crisis

The NPAs of commercial banks and public sector banks have increased to 11.2% (Rs 10.3 trillion) and 14.9% (Rs 8.9 trillion) respectively as of March 2018. Four Banks had GNPAs more than 20% in 2019. Also, agriculture and service sectors depicted a decline in asset quality to 10.1% and 6.3%, respectively. The NPAs have increased successively from 2016 to 2019 by 15 trillion, ₹22 trillion and ₹26 trillion. Though recent government reforms to improve the banking industry have resulted in a decline of NPAs, most of them showed a decrease after being written off as bad debts. The latest financial stability report released by RBI depicted a vicious circle of NPAs, which if not addressed on time, could further damage the economy. PSBs recovered around Rs 52,000 crores and had an increase in provision coverage at 76.6 percent, highest in seven years till September 2019.

A stress test on banks projected an increase of 13.5% in NPAs of public sector banks and 4.2% of private banks by September 2020.

The Needed Reforms

The apex regulator needs to identify excess credit, if any, and take measures to limit it by using monetary policy. The government must contribute to the banking sector by improving its relationship with the bank board. Also, it should limit interference in the commercial decisions of the banks. Banks need to limit their reliance on project appraisal from only one agency for providing loans and must invest in training their employees in risk management to avoid turning their loans into bad debts. Besides, banks must have an internal vigilance committee to look for any frauds and siphoning of funds. Experts also suggest rupee depreciation citing the weakening economy. It may turnaround the protectionist policy and improve exports.

In all, though an increase in NPAs shows the success of the government’s latest reforms in the financial sector, the target of USD 5 trillion economy seems difficult if the economy grows at such a pace.

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