NPA or non-performing assets are a severe concern for banks in India. It not only negatively impacts the bank’s profitability but also the bank’s capacity to lend to borrowers.
As per the RBI’s June Financial Stability Report, as of March 2024, the gross non-performing assets (GNPA) were at the 12-year lowest value of 2.8%. The same report added that the NPA is expected to decrease to 2.5% by the end of the current fiscal year.
However, how will NPA be reduced further in PSU banks? Read this guide to learn the strategies developed.
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Strategies Adopted to Reduce PSU Banks’ NPAs
By definition, NPA is a loan or an advance that a borrower has taken but has stopped paying the interest or principal amount for a minimum of 90 days. The bank takes various steps to recover the outstanding balance, including mail and notices.
But if the bank fails, the assets are marked as default to be written off, leading to monetary loss and also impacting the overall market and Bank Nifty Share price.
But to reduce the NPAs, banks, and RBI have developed proactive strategies to reduce such instances. These are as follows:
1. The 4R Strategy
The 4R strategy, recommended by the RBI for managing NPAs in PSU banks, consists of the following:
- Recognition: Banks need to precisely detect and categorize troubled loans as NPAs to maintain clear financial records.
- Resolution: This step includes either restructuring feasible loans for easier repayment terms or using legal actions to recover funds.
- Recapitalization: The government aids banks by providing financial support to help them sustain required capital levels and cover losses from NPAs.
- Reforms: Banks implement improvements in risk management, governance, and operational processes to prevent the build-up of future NPAs.
2. Asset Reconstruction Companies (ARCs)
ARCs play a crucial role in the NPA management ecosystem by purchasing stressed assets from banks at a discount.
This helps banks clean their balance sheets and focus on their core banking activities. ARCs then work to recover the amounts through various resolution strategies, including restructuring or selling the assets.
3. One-Time Settlement Schemes
These schemes are designed for specific borrower categories, allowing them to clear their dues by paying a lump sum typically less than the total outstanding.
This provides relief to the borrower and helps banks recover a portion of their stuck funds quickly.
4. Insolvency and Bankruptcy Code (IBC)
The IBC provides a legal framework to process insolvencies and bankruptcies in a time-bound manner. It prioritizes the resolution of stressed assets, aiming to maximize their value, thereby benefiting the creditors, including banks.
Implementing the IBC has significantly improved the recovery rates from distressed assets.
What is the Result of These Strategies?
The effectiveness of the strategies implemented by PSU banks is well-supported by data from the recent FICCI-IBA survey that highlighted:
1. Decrease in NPA Levels
90% of public sector banks (PSBs) reported a reduction in their NPA levels, highlighting the success of their strategic measures to tackle non-performing assets. Meanwhile, 67% of private sector bank respondents noted decreased NPA levels. The top 5 PSU banks with the highest fall in NPAs are:
- Bank of Maharashtra: Net NPA down to 0.2%.
- State Bank of India: Gross NPA improved to 2.24%.
- Bank of Baroda: Gross NPA reduced to 2.92%.
- Indian Bank: Gross NPA cut to 3.95%.
- UCO Bank: Gross NPA fell to 3.46%.
2. Credit Growth
More than two-thirds of the banks surveyed, including PSU and private banks, reported an optimistic outlook for non-food industry credit growth, expecting it to be above 12% over the next six months.
This impacted positively on various banks including BoB share price and the Bank Nifty index.
Conclusion
With PSU banks enhancing asset quality and employing effective strategies, this sector offers the potential for substantial returns. Investors should consider the benefits of engaging with these financially resilient banks.
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