Growing NPAs and capital infusion

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A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.According to RBI, terms loans on which interest or installment of principal remain overdue for a period of more than 90 days from the end of a particular quarter is called a Non-performing Asset.

However, in terms of Agriculture / Farm Loans; the NPA is defined as under:

  • For short duration crop agriculture loans such as paddy, Jowar, Bajra etc. if the loan (installment / interest) is not paid for 2 crop seasons , it would be termed as a NPA.
  • For Long Duration Crops, the above would be 1 Crop season from the due date.

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act has provisions for the banks to take legal recourse to recover their dues. When a borrower makes any default in repayment and his account is classified as NPA; the secured creditor has to issue notice to the borrower giving him 60 days to pay his dues. If the dues are not paid, the bank can take possession of the assets and can also give it on lease or sell it; as per provisions of the SAFAESI Act.

Reselling of NPAs :- If a bad loan remains NPA for at least two years, the bank can also resale the same to the Asset Reconstruction Companies such as Asset Reconstruction Company (India) (ARCIL).  These sales are only on Cash Basis and the purchasing bank/ company would have to keep the accounts for at least 15 months before it sells to other bank. They purchase such loans on low amounts and try to recover as much as possible from the defaulters. Their revenue is difference between the purchased amount and recovered amount.

Steps taken by RBI:

  • Establishment of private Asset Reconstruction Companies (ARCs)

Many ARCs have been created, but they have solved only a small portion of the problem, buying up only about 5 percent of total NPAs.

  • Strategic debt restructuring scheme: under this creditors could take over firms that were unable to pay and sell them to new owners.
  • Sustainable structuring of stressed assets: under this creditors, could take over firms with debt reduction up to 50% in order to restore their financial viability.
  • Asset quality review: to stream line the balance sheet to reflect the true picture.
  • Indradhanush scheme: capital infusion in PSB’s

Analysis of the scheme:

Success of the schemes are limited. There are several reasons for this:

  • The Asset Quality Review (AQR) was meant to force banks to recognise the true state of their balance sheets but bank keep on evergreening loan.
  • The RBI has encouraged creditors to come together in Joint Lenders Forums, where decisions can be taken by 75 percent of creditors by value and 60 percent by number. But reaching agreement in these Forums has proved difficult, because different banks have different degrees of credit exposure, capital cushions, and incentives.
  • The S4A scheme recognises that large debt reductions will be needed to restore viability in many cases. But public sector bankers are reluctant to grant write-downs, because there are no rewards for doing so.

Capital Infusion

Also known as the cross-subsidization of divisions within a firm. When one division is not doing well, it might benefit from an infusion of new funds from the more successful divisions. In the context of venture capital, it can also refer to funds received from a venture capitalist to either get the firm started or to save it from failing due to lack of cash.

Government announced Indradhanush plan for revamping Public Sector Banks (PSBs) in August 2015. The plan envisaged, inter alia, infusion of capital in PSBs by the Government to the tune of Rs. 70,000 crore over a period of four financial years. Government has recently announced decision to further recapitalise PSBs to the tune of Rs. 2,11,000 crore, through recapitalisation bonds of Rs. 1,35,000 crore and budgetary provision of Rs. 18,139 crore (the residual amount under Indradhanush plan) over two financial years, and the balance through capital raising by banks from the market. Government has so far infused capital of Rs. 59,435 crore in PSBs under Indradhanush.

Capital infusion is aimed at supplementing the achievement of regulatory capital norms by PSBs through their own efforts and, in addition, based on performance and potential, augmenting their growth capital. Government has announced that a differentiated approach would be followed, based on the strength of each bank.PSBs have been recapitalised to the tune of Rs. 1,28,861 crore through infusion and mobilisation of capital from the market.

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