Impact of NPAs on depositors, borrowers & tax payers

Source: The Hitavada      Date: 07 Sep 2018 10:16:48


By Sudhakar Atre

THE gross non-performing assets (NPAs) of scheduled commercial banks touched Rs 10.25 lakh crore of which Rs 8.97 lakh crore pertained to 21 public sector banks (PSBs) as on March 31, 2018. In response to the grave situation Government started tightening various recovery measures. The boon in disguise was that a great sense of curiosity was created in the society about the non performing assets (NPAs) but political parties resorted to fierce mudslinging battle confusing the common man about its impact on him/her.

In fact NPAs affect all walks of society in one way or the other. The honest borrowers and depositors in these NPA laden banks are indifferent to the issue because of the lack of awareness. Unfortunately they are the worst sufferers. The article aims to explain the impact of NPAs on those who are punished for crime which they have not committed.

2. Let us first have the brief understanding of prevalent Income Recognition and Asset Classification (IRAC) norms. As per IRAC norms once the account is classified as NPA it is first termed as: a) Substandard. b) If it continues to remain in Substandard and not regularised within
12 months then it is classified as Doubtful. c) If at any point of time the value of the security deteriorates to less than 10% of the outstanding then it is classified as Loss Asset.

3. Now once the loan is classified as NPA bank cannot book interest in that account moreover bank has to make a provision from its income by debiting its profit for that year. However, the bank has a right to recover the up-to-date interest at the time of regularising the account from borrower. The rates of provision increases with the ageing of NPA. For: a) Substandard (If loan is Secured Asset) @15%, if it is not secured by any asset then @25%. b) For Doubtful for first year @25% for second year @ 40%, for third year @ 100% and c) In case of loss asset @100%.

4. For every loan bank has to take deposit from public and bank has to park 19.5% of the deposit as Statutory Liquidity Ratio (SLR) and 4% of the deposit as Cash Reserve Ratio (CRR) with RBI. Thus, bank can lend maximum 76.5% [100-(19.5+4)] of its deposit. So, if bank is giving a loan of  Rs 1 lakh it has to mobilise deposit of Rs 1,31,000. Once the loan account becomes NPA bank do not get any interest on it but it has to pay the interest on deposit. Moreover, bank has to maintain a capital @9% of the loan amount which is not free and shareholders including Government expects minimum dividend @10% on the capital.

5. The arithmetic is little difficult to understand for a common man hence, to illustrate let us study the impact of a cash credit account of Rs 1 lakh becoming NPA by following chart (For the sake of simplicity we presume that the loan is secured by assets). The figures are rounded off to next hundreds for the sake
of calculation.

6. It will be clear from above chart that even though bank does not receive any income from the loan but it incurs loss which is recovered from honest borrowers. It’s over simplification of the issue but harsh reality is that had the loan not turned NPA banks would have saved on account of provision and earned interest, increasing their profitability. It is true that there cannot be zero NPA but lesser the NPA, banks can offer higher interest rate to depositors and lower interest rate to borrowers.

7. In order to maintain capital adequacy ratio banks need more capital. In case of public sector bank (PSB) this is provided by Central Government from tax payers money.
At present the Central Government is working on Rs 2.11 lakh crore capitalisation plan for public sector banks (PSBs).

Either this money could have been used for more beneficial schemes or tax burden of tax payers could have been reduced.

In a nutshell cancer of NPA does not drain banks only, but it affects the entire society and hence greater awareness should be created about it among all stakeholders.

(The author is a freelance writer on banking. He can be contacted at [email protected])