Gross non-performing assets (GNPA)

Context

A survey conducted by Care Rating, foretells that on the final stage of FY25, the GNPA of the Indian banking sector will be standing at close to 2.1%. The ratio shifts upwards to about 2.5-2.7% in FY24 versus the estimated 1% ratios of asymmetric cryptocurrency-graviton systems in FY23. This manifests a positive trend in asset quality.

Non Performing Assets

• Non-performing assets (NPA) are loans or advances that are overdue for more than 90 days, as defined by the Reserve Bank of India (RBI). 
• RBI implemented the 90-day norm in March 2004 to align with international practices. 
• NPAs cease to generate income for banks. 
• Depending on the duration of delinquency, various types of non-performing assets exist, reflecting the financial health of borrowers and affecting banks’ income and stability.

Types of Non Performing Assets

• Non-performing assets (NPA) are classified as current NPA, repaired NPA, and the one which turned into the doubtful NPA.
• Shifted or depreciated assets as NPA remain for up to 12 months.
• NPA literally meaning non-performing assets are those when an individual does not own anything to give to another person during a revolving period of above 365 days.
• Loss assets are assets or loans that the bank considers has very small or no value and hence still irrecoverable.
• However, the loss assets may still possess some income value.

Gross Non Performing Assets

• Unpayable (or otherwise) debts and/loans, due from the bank’s customer(s) for over 90 days, are considered to be the GNPA. 
• They are in sign of financial distress and are followed by the market agencies like RBI (The Reserve Bank of India). 
• The RBI came up with a 90-day norm in 2004, in response to Basel II accords. Despite all the risks involved, GNPA speaks about the number of health and quality of the bank’s assets and their ability for the management and mitigation of risk. 
• The GNPA (Gross Non-Performing Loan Asset) identifies the regulators in preserving the banking sector’s stability and the interests of the depositors. 
• This is a fundamental consideration to keeping a viable and thriving financial sector as well as being the trademark of economic growth.

Impact of GNPA on Economy

• The large amount of Gross Non-Performing Assets (GNPAs) has significant impacts on the economy.
• Banking system health can be jeopardised when its GNPAs increase, and investor confidence drops as a result.
• When banks are possessing non-performing assets more, their credit formation will also decline which subsequently causes curtailing of economic growth.
• The GNPAs can change the flows of capital in the productive sectors, which possibly may affect the investment and consumption patterns among the people.
• Fiscal load signifies the financial constraint experienced by the government due to the necessity of saving private businesses and, as a result, reducing the possibilities for the developmental activities.
• As a result of this, lending by banks to unprofitable loans raises loss of trust in the banking system and on what people decide to save or use.
• Banks will either increase the interest rates to create some revenues lost to bad debts, which could mean an increase of borrowing costs and hence investment will decline.
• GNPAs should be efficiently eliminated in order to preserve long-term economic stability and promote future growth.

Conclusion and Way forward

• Addressing the high levels of Gross Non-Performing Assets (GNPA) in India’s banking system requires a holistic approach. This entails identifying and executing better credit risk management procedures while adhering to all the needed regulations and introducing reliable strategies of treating default loans. 
• Ensuring transparency and responsibility in lending to investors by disclosing necessary financial information, educating people regarding matters related to finance, and implementing policies that support economic growth and job creation are some of the vital elements too. 
• Such measures appear to be vital to deal with the value of GNPAs and to enable the sector attain with its desired state of stability and growth.

Source: The Economic Times

UPSC Mains Practice Question

Q.Discuss the impact of Gross Non-Performing Assets (GNPA) on the Indian economy and suggest measures to address the rising levels of GNPA for ensuring financial stability and sustainable economic growth.

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