Non- Performing Assets under Banking Sector

Non- Performing Assets under Banking Sector

The development of stable financial institutions, particularly banks, is a prerequisite for preserving the overall stability of the nation's financial system. The high level of non-performing assets (NPAs) in banks and financial institutions is a serious concern to the public because bank credit is the engine driving the nation's economic expansion and any obstruction to the free flow of credit, including the rising NPAs, will unavoidably have a negative impact on the economy. The cycle of lending-repaying-borrowing is disrupted when loans are taken out but not returned because a large portion of the money leaves the financial system. In 2001, the total amount of outstanding NPAs stood at Rs.83,500/- crores, since then the quantum of nonperforming assets has been expanding by leaps and bounds, wreaking havoc on the Indian financial system.

Non-performing assets, abbreviated as NPAs, are typically defined as loans or advances that are considered to be in default or arrears.  In essence, it refers to a loan or advance that brings in no money for the bank. Furthermore, a loan is said to be in arrears if the interest or principal payment is not made or is missed. On the other hand a loan is said to be in default when the lender considers the loan agreement has been broken and the debtor is unable to satisfy his commitments.

Also, NPA’s were defined as follows by the Narasimha Committee, which was focused on enhancing the financial system's efficiency:

"A non-performing asset is a loan or advances for which the principal or interest payment remains overdue for a period of 90 days."


For this reason, the Reserve Bank of India has divided assets into four categories: standard assets, substandard assets, doubtful assets, and loss assets:

1.      Standard Assets: A performing asset is unquestionably a standard asset. People/organizations holding standard assets make payments as they become due and create continual revenue. These assets are not NPAs but do carry a standard level of risk.

2.      Sub-Standard Assets: Assets that have been declared as non performing for a full year 

3.      Doubtful Assets: Assets that have been labelled as non-performing for longer than a year are considered doubtful assets

4.      Lost Assets: These are considered to be the assets that are beyond restoration. Identification of these assets is the responsibility of the Central Bank or the auditors.

Before designating an asset as non-performing, banks typically take into account a number of factors. If, however, these reasons are not satisfactory in accordance with their standards, the loan is designated as non-performing. At that point, banks can foreclose and use the provided collateral to recover the debt. Banks are quite concerned about the rise in non-performing assets since it reduces their earnings and makes it harder for them to make loans through provisioning. This might be ascribed to careless lending practises, borrowers' purposeful default, or their inability to repay. Many reform programmes, including Asset Reconstruction Companies (ARCs), corporate debt restructuring plans, strategic debt restructuring plans, sustainable structure of stressed assets, etc., have been introduced in the past to address the NPA issues.

The RBI has given banks instructions on how to fairly and effectively designate assets as non-performing. In a nutshell, these guidelines state that when classifying assets into the aforementioned categories, it is important to take into account both the degree of clearly defined credit weaknesses and the degree of reliance on collateral security (such as a promoter guarantee, shares, real estate, etc.) to pay debts.

It was anticipated that the Insolvency and Bankruptcy Code's (“IBC”) resolution mechanism will expedite the process of exerting control over asset quality. Formerly, the RBI and the relevant bank worked together to find solutions to issues relating to NPA and restructured assets.

The way that distressed corporate debtors are resolved has changed as a result of the introduction of the IBC. It establishes a thorough process for the prompt liquidation of the corporate debtor under the control of the National company law tribunal ("NCLT"). The recovery process using the IBC is substantially quicker, however there are certain difficulties. The number of cases closed under the insolvency resolution regime has been significantly less than what was proposed in the resolution, according to figures from the Insolvency and Bankruptcy Board of India (IBBI). As a result, various adjustments must be performed in order to guarantee the accuracy of the Code's application.


1.      Insolvency and Bankruptcy Code: There were numerous laws and institutions with overlapping jurisdictions and functions prior to the implementation of the Insolvency and Bankruptcy Code, 2016, which caused significant difficulty when handling insolvency and bankruptcy procedures against both individuals and businesses. In India, there was no legal structure that offered an effective approach to aid in debt collection, which damaged banks and other financial organizations and restricted the flow of credit. The Insolvency and Bankruptcy Code Bill, which the government introduced in 2015 and which was later passed and put into effect in 2016, was created to get over these obstacles. The object of IBC has been discussed in Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, (2021) 7 SCC 209 wherein it was noted that, “The objective of the Insolvency and Bankruptcy Code, 2015 is to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the priority of payment of government dues and to establish an Insolvency and Bankruptcy Fund, and matters connected therewith or incidental thereto. An effective legal framework for timely resolution of insolvency and bankruptcy would support development of credit markets and encourage entrepreneurship. It would also improve Ease of Doing Business, and facilitate more investments leading to higher economic growth and development.”


2.      Debt Recovery Tribunals: Upon filing of Original Applications, also known as OAs, in the Debt Recovery Tribunals ("DRT") and appeals in the Debt Recovery Appellate Tribunals ("DRAT"), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act) provided for quick recourse for lenders and debtors. As a result, the DRTs and DRATs have been established under the RDDBFI Act to help meet the demand for quick resolution of NPAs for banks. The DRT also has the authority to rule on applications made by the borrower or mortgager against secured creditors for actions conducted in accordance with the Securitization Act. It was observed in Para 4 of Union of India v. Debts Recovery Tribunal Bar Assn., (2013) 2 SCC 574 that, “Due to delays in the disposal of such suits by the civil courts on account of heavy dockets, the recovery of loans and enforcement of securities suffered. Thus, an urgent need was felt to work out a suitable mechanism through which the dues of the banks and financial institutions could be realised expeditiously. This led to the establishment of DRTs and the Debts Recovery Appellate Tribunals (for short “DRATs”) under the Rddbfi Act for expeditious adjudication and recovery of debts due to banks and financial institutions.”



3.      Sarfaesi Act: The SARFAESI Act, also known as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, was created following deliberations by committees that the government had established to look into the necessary legal and financial system changes and reforms for the debt recovery mechanisms. This Act's primary goal is to expedite the recovery of delinquent loans and to assist in easing the rising pressure on the banks brought on by the rise in NPAs. By allowing them to seize securities and sell them to lessen the burden of non-performing assets, the act gives banks and financial institutions a vehicle for better asset recovery. In the case of State Bank of Travancore v. Mathew K.C., (2018) 3 SCC 85, The financial institutions in India did not have the power to take possession of securities and sell them. The existing legal framework relating to commercial transactions had not kept pace with changing commercial practices and financial sector reforms resulting in tardy recovery of defaulting loans and mounting non-performing assets of banks and financial institutions. Narasimhan Committee I and II as also the Andhyarujina Committee constituted by the Central Government Act had suggested enactment of new legislation for securitisation and empowering banks and financial institutions to take possession of securities and sell them without court intervention which would enable them to realise long-term assets, manage problems of liquidity, asset liability mismatches and improve recovery. The proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hereinafter referred to as “the DRT Act”) with passage of time, had become synonymous with those before regular courts affecting expeditious adjudication.


4.      Lok Adalats: One of the alternative dispute resolution procedures established by the government is the Lok Adalat. It serves as a venue for the mutual resolution of legal disputes or cases that are still pending or in the preliminary stages of litigation. The Legal Services Authorities Act, 1987 has conferred legal status upon Lok Adalats. 



The issue of non-performing assets (NPAs) is getting worse in India, harming both the banking industry and the country's economy overall since it affects the availability of credit and causes more and more banks to fail. The Government is aware of this issue and has taken action to guarantee that the banks are able to function and that the economy has access to credit. Notwithstanding a downward trend in loan recovery, it has been observed a decrease in gross non-performing assets (NPAs). This could be caused by the bank write-offs. The banks wrote off NPAs of Rs. 1.91 lakh crores in 2020–21. The write-offs in 2019–20 totaled about Rs. 2.2 lakh crores. The overall amount of NPA write-offs for the five-year period from 2016–17 to 2020–21 is almost Rs. 8.8 lakh crores.

Banks have a number of challenges in today's society, the most important of which is non-performing assets, which we have already covered in great detail. So, in order for the banks to improve their effectiveness and profitability, the non-performing assets must be effectively managed and monitored. Compared to 14.5 percent under the SARFAESI Act, the IBC has a recovery rate of 42.5 percent of the amount at issue in NPA cases. In the "Ease of Doing Business 2020 Report" published by the World Bank, India is ranked 63rd, up from 77th in 2018. From 108th to 52nd place in the ranking for resolving insolvency in 2019, India advanced 56 spots. The recovery rate was 26.5 percent in 2018 whereas 71.6 percent in 2019.

The system of credit risk management used by banks is where the issue of rising NPAs first emerged. Banks must set up pre-sanctioning appraisal responsibilities and an effective post-disbursement supervision with sufficient preventive measures. Loans should be regularly monitored by banks in order to spot accounts that could eventually stop performing. To guarantee that funds are used to their full potential, banks must use their inspectional capabilities. Moreover, banks may be given the authority to recoup loans from the borrower's guarantor.



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