Current affairs - Impact of non-performing assetsWhat is a Non-Performing Asset?

In the account books of banks, the deposits made by public are categorised as liabilities while the loans and advances made by the banks to its customers are categorised as assets.

According to RBI those assets on which the instalments of interest or principle or both remain overdue for a period of 90 days of more are classified as Non-Performing Assets (NPAs). In other words, those assets of banks which have stopped performing are NPAs.

Impact of Non-Performing Assets(NPAs) on Banks

The increasing NPAs not only reduce the profitability of banks but also affect its credibility. In fact the massive amount of NPAs with commercial banks is threatening to erode half of the capital base of public sector banks.
Once a bank started incurring losses, the problem may destabilize the confidence of the depositors and depositors may start withdrawing money from the banks leading to collapse of banking sector.

Impact of Non-Performing Assets(NPAs) on Industry

As a result of increasing NPAs in industrial sector, banks were reluctant to fund the needs of industrial sector hampering its growth. The shortage of funds to the industrial sector will affect the growth of the industrial sector. The continuous shrinking of credit to industrial sector is detrimental to not only industries but overall economy as well.

Impact of Non-Performing Assets(NPAs) on Economy

Strong banking sector is one of the most significant prerequisite of strong economy because it channels the savings into the investment. Today, the Indian banking industry is dealing with the mammoth amount of NPAs which is fifth largest in the world. Infrastructure accounts for biggest chunk of NPAs.

Because of massive amount of NPA in infrastructure, the banks are now reluctant to fund this sector. As the infrastructure is one of the most important sectors in economy which fuels the growth of other sectors, draining of resources to infrastructure may hamper the growth of Indian economy.

Overall impact of increasing Non-Performing Assets(NPAs) can be summarized as follows:

  • The higher is the amount of non-performing assets (NPA) the weaker will be the bank’s revenue stream.
  • Indian Banking sector has been facing the NPA issue due to the mismanagement in the loan distribution carried by the Public sector banks.
  • As the NPAs of the banks will rise, it will bring a scarcity of funds in the Indian 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 of money as banks themselves will find it tough to survive in the market.
  • This will lead to a crisis situation in the market.
  • The price of loans, interest rates will shoot up badly. 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, who will have to shell out a higher interest rate for a loan.
  • All these factors hurt the overall demand in the Indian economy.
  • Finally, it will lead to lower growth and higher inflation because of the higher cost of capital.

All sectors will be directly or indirectly affected changing the overall economic scenario due to the exposure to the bad loans. Hence, the issue of NPA must be resolved on urgent basis.