The official handle of the Congress Party tweeted yet another lie on the NPA (Non Performing Assets, also known as bad loans) issue. It posted an article that claimed that NPAs had risen by over 5 lakh crores in just 42 months.
The article blamed the NDA government for rise in NPAs. But in reality, the NPA problem is purely a legacy issue which has been dropped on the current NDA government.
Root cause for accumulation of NPAs
What is a NPA?
A nonperforming asset (NPA) refers to a classification for loans on the books of financial institutions that are in default or are in arrears on scheduled payments of principal or interest. In most cases, debt is classified as nonperforming when loan payments have not been made for a period of 90 days. – Investopedia
A non performing asset is basically a loan that does not bring any returns to the bank and puts a pressure on its financial health. The NPA problem has arisen in India because of three important reasons.
- Reckless lending without accounting for risks : Projects that have high risk are usually avoided by banks. It is evident that lending was done recklessly during high growth period during the UPA regime. Some of these loans were also given due to political pressure on banks.
- Ever-greening of loans : Postponing the date of repayment of loans without any final deadline.
- Lack of an exit mechanism like Insolvency and Bankruptcy code for firms that have failed : Failure in business due to problems outside the control of entrepreneurs is possible. In that case a legal route for exit must be available. Otherwise, banks evergreen loans that they have extend and hide NPAs from regulatory authorities.
Why is Congress wrong in accusing NDA for rise in NPAs?
Accusing the NDA for bad loans problem is ridiculous because the lending activity in the economy has been muted in the past three years due to poor health of banking system. To solve the mess in India’s banking system, the current government has systematically taken actions to identify NPAs and enacted insolvency laws to resolve them in a transparent manner.
The finance minister had clarified in the recent session of Parliament that bulk of these NPAs originate from the pre-April 2014 period. It is evident the asset quality review (AQR) launched by the RBI in second half of 2015 has succeeded in uncovering hidden NPAs in India’s banking system.
The drive to uncover the hidden NPAs from books of the public sector banks was further aided by the amendment to the Banking Regulation Act 1949, which enabled RBI to give directions to banks to deal with NPAs. Hence, the percentage of NPAs that have been acknowledged has risen from 4.1% in March 2014 to 10.2% in September 2017.
The measures taken under the NDA have only improved the transparency and accountability in public sector banks. Therefore the Congress party is absolutely wrong in blaming the current government for the bad shape of India’s banking sector.