Pros And Cons Of Npa

WHAT CAN THE GOVERNMENT DO TO ADDRESS THE PROBLEM OF NPA

What is NPA??

A Non-performing asset is defined as a credit with respect to which the interest or instalment of principal has remained ‘past due’ for a specified period of time. In simple terms, an asset is tagged as non-performing when it ceases to generate income for the lender.

This term is used by financial institutions to refer to loans which in the danger of defaulting. NPAs are problematic to financial institutions as their main source of income is the interest that they gain from their lending process. NPA increases when the economy is under pressure. India adopted the international standard for identifying NPAs on March 31st 2004. NPAs are identified as follows:

1. Interest and/or

Banks play an important role in providing financial resources especially to capital-intensive sectors such as infrastructure, automobiles, iron and steel, industrials and high-growth sectors such as pharmaceuticals, healthcare. In emerging economies, banks are more than just agents of financial support, they carry the additional responsibility of achieving the government’s social agenda also. Because of this close relationship between banking and economic development, the growth of the overall economy is correlated to the health of the banking

2) Banks will be able to clean up their books rapidly and still hold on to the asset. Banks will move the company from their lending books as loans get converted to equity.

3) Change in ownership will help banks recover their money fast if the new promoter brings in the desired results.

4) RBI, through this change, has made it clear on how the company will be valued. Since most of these companies are sick and do not have any net worth; valuation was a tricky issue.

5) Selling such sick companies would help banks increase lending but also increase the output from the affected companies, thus adding to the overall growth of the