Lessons from NPAs crisis in Indian banks

• DOI: http://doi.org/10.1002/pa.1672
• Author: Abhay Pant,Ganesh Kumar Nidugala
• Published date: 01 November 2017
• Date: 01 November 2017

PRACTITIONER PAPER

Lessons from NPAs crisis in Indian banks

Ganesh Kumar Nidugala |Abhay Pant

Department of Economics, Indian Institute of

Management Indore, Indore, India

Correspondence

Ganesh Kumar Nidugala, Department of

Economics, Indian Institute of Management

Indore, Prabandh Shikhar, Rau‐Pithampur

Road, Indore, Madhya Pradesh 453556, India.

Email: ganesh@iimidr.ac.in

Nonperforming assets (NPAs) crisis in Indian public sector banks is one of the biggest challenges

before the current government in 2017. The finance ministry, Government of India, and the cen-

tral bank, the Reserve Bank of India, are worried about the surging NPAs in Indian public sector

banks because of their huge macroeconomic impact and systemic risk to the financial system. If

not paid timely attention, it can hamper the economic and financial stability of the nation. Rising

NPAs in Indian public sector banks are a result of bank specific, macroeconomic, and political fac-

tors. In order to control the surging NPAs in Indian public sector banks, the government and the

Reserve Bank of India have implemented new crisis management framework which however is

not immune to several challenges. This paper looks at NPAs crisis from the lens of crisis manage-

ment, stakeholder0s engagement, government relations, and issue management. Harris and

Fleisher (2016) identify crisis management, stakeholder engagement, government relations, and

issues management as important organizational activities that constitute part of public affairs.

This paper follows a tripartite structure where it first investigates the causes of NPAs in Indian

public sector banks. Second, it examines the crisis management framework developed by the pol-

icy makers and highlights the key challenges. Third, in light of these challenges, it makes recom-

mendations to tackle the NPAs crisis in Indian public sector banks.

1|INTRODUCTION

In the line with international best practices, nonperforming assets

(NPAs) are those assets which fail to yield any income for the bank.

The surging NPAs in Indian banking sector has posed a serious threat

to the financial stability of the nation. The rising bad loans in public

sector banks have paralyzed their performance leading to huge losses

for these banks. According to Arvind Panagriya, Niti Aayog0s

1

vice

chairman, rising NPAs is a gigantic problem and the biggest challenge

before the current government.

2

Arvind Subramanium, chief economic

adviser to the government called India0s NPAs problem as the no. 1

macroeconomic challenge for the Indian economy.

3

Bad loans crisis

has stagnated the growth and performance of the banking sector with

large number of public sector banks experiencing losses. The credit

growth in Indian banking sector is continuously falling and has regis-

tered a growth rate of 4.8% as on February 17, 2017 as against

11.2% growth rate in the period a year ago.

4

Falling credit growth in

banking sector has affected the economic growth of the nation. The

gross NPAs

5

of public sector banks

6

have surged by 56.4% (to Rs.

6.14 trillion) for the 12‐month period ended December 2016.

7

Indian

banking system (public‐owned plus private‐owned banks) is crippled

with the NPAs of around Rs. 8 trillion out of which public sector banks

account for more than 75%.

8

Public sector banks are in a mess as their

capital adequacy is under strain, return on assets and return on equity

are negative, and more than quarter of loan given by these banks to

1

Niti Ayog is India0s official policy think tank which replaced the erstwhile plan-

ning commission.

2

http://indianexpress.com/article/business/banking‐and‐finance/npa‐chal-

lenge‐the‐biggest‐before‐centre‐arvind‐panagariya/, accessed June 23, 2017.

3

NPA issue is India0s No.1 macroeconomic challenge: Arvind Subramanian,”

Money Control, March 29, 2017, http://www.moneycontrol.com/news/busi-

ness/economy/npa‐issue‐is‐indias‐no‐1‐macroeconomic‐challenge‐arvind‐

subramanian‐2248985.html, accessed April 02, 2017.

4

http://www.business‐standard.com/article/economy‐policy/bank‐credit‐

growth‐falls‐to‐4‐8‐117030400009_1.html, accessed July 11, 2017.

5

Gross NPAs are given as the sum of all loan assets recognized as NPAs under

RBI regulations or guidelines. As per RBI, Net NPAs = Gross NPA −(Balance in

Interest Suspense account + DICGC/ECGC claims received and held pending

adjustment + Part payment received and kept in suspense account + Total pro-

visions held). The well‐known practice is to use the ratio of gross NPAs to gross

advances and net NPAs to net advances.

6

Public sector banks are state‐owned banks where majority of ownership (at

least 51% of equity) is by the government of India.

7

http://indianexpress.com/article/business/banking‐and‐finance/bad‐loan‐cri-

sis‐continues‐56‐4‐per‐cent‐rise‐in‐npas‐of‐banks‐rbi‐4533685/, accessed July

09, 2017.

8

http://www.firstpost.com/business/employees‐of‐national‐banks‐threatens‐

strike‐on‐22‐august‐over‐mergers‐non‐performing‐assets‐3762797.html,

accessed July 09, 2017.

Received: 18 July 2017 Accepted: 24 July 2017

DOI: 10.1002/pa.1672

J Public Affairs. 2017;17:e1672.

https://doi.org/10.1002/pa.1672

Copyright © 2017 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/pa 1of6