While India keeps developing its financial systems with initiatives like Digital India and has remained stable financially, the concern of rising levels of non-performing assets (NPAs) still persists. RBI in a recent financial stability report (FSR) report highlighted that financial institutions struggle to maintain their asset quality.

There has been a significant deterioration during Sep 2016 to Mar 2017 in the banking stability indicator (BSI) as a result of poor asset quality. The BSI takes into account five factors namely:

npa management process

Another report by BSI released in Dec 2016 stated that the banking sector faces a continuous and increased risk as an outcome of lower profitability, liquidity and asset quality. It is believed that the most depressing times are yet to be encountered. A latest financial stability report (FSR) of 2017 prepared after a macro test observed that the gross NPA level in scheduled commercial banks as on Mar 2017 was noted to be 9.6% and 10.2% in Sep 2017. This percentage may surge further to 11.1% by Sep 2018 considering the current trend.

RBI believes and warns that in a severe stress situation, quite a handsome number of banks will suffer from a credit shock, which will directly affect their profitability.

In such an alarming situation, financial institutions must focus on the following 3 factors to control and manage their asset quality:

asset quality factor

1. Credit Flow

There must be significant efforts in improving the credit flow. While the flow of credit was 50% from banks to commercial sector in year 2015-16, it dropped down drastically to only 38% in year 2016-17. Why should this trend increase rather than decrease? Because, better credit flow will mean lesser rate of interest on borrowings, ease of getting loans and loose credit requests.

2. Large borrowers

During Sep 2016 to Mar 2017, the large borrowers accounted for 56% of the gross loans and advances, which was almost 86.5% of gross NPAs with scheduled commercial banks. There must be defined limits for exposure to large borrowers. In Dec 2016, RBI had set this limit to 20% and 25% for single entity and business group respectively. More such strict arrangements are required.

3.Credit Discipline

The reason behind increasing NPAs in Indian banks and credit societies can be linked to poor discipline and management decisions. Methods like prompt corrective action (PCA) must be adopted in the financial systems to ensure credit discipline is practised at all levels. The need to promote a robust banking system is essential.

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