1. Bank NPA #1: Twin Balancesheet Problem (TBS)- Three Stages of
  2. Bank NPA #2: SDR, S4A, 5/25 Scheme, AQR, JLF, CAP, SARFAESI, I&B Code
  3. Bank NPA #3: Bad Bank “PARA”, RBI’s Windfall Profit Post-Demonetization, 4R4D

Prologue: from now on, all Powerpoint available at https://mrunal.org/powerpoint

Bank NPA #1: Twin Balancesheet Problem (TBS)- Three Stages of

  • Although we learned about the NPA- Twin balance sheet problem in last year’s lecture series (BES161) but since the new economic survey and budget have mentioned the same topics, and UPSC has not yet asked substantial number of MCQS from here, so we’ve to recap.
  • As of 31 December 2015, the total non-performing asset of scheduled commercial banks in India have stood at 9.6 lakh crores. Majority of this NPA is concentrated among the public sector banks (PSBs).
  • Economic survey notes that the level of NPA in Indian economy, is among the highest in the BRICS nations!
  • This NPA problem has created stress in the balance sheets of both the corporate and public sector banks, hence a new term was coined “twin balance sheet problem”.
  • CEA Arvind Subramanian has outlined three stages in which this cancer has spread in the Indian economy 1) before the sub-prime crisis, there was a surge in borrowing 2) after the global financial crisis, there was a fall in demand 3) ultimately, corporates had debt servicing problems to a point where their revenue was insufficient even to pay for the interest.
  • What is IC1 company?
  • Although, India’s case is unique because despite such high level of India, our economy has not collapsed, or come to a standstill, unlike those advanced economies after the sub-prime crisis, or those East Asian tigers after the crisis of 1997.
  • Survey projects two scenarios of the NPA/TBS problem: 1) phoenix 2) containment.
  • Because of this problem, banks have become reluctant in their lending operation especially the micro and small enterprises.
  • The decline in the profitability, has also led to fall in the share prices of public sector banks, some of them even selling below their face value.

Youtube Link: https://youtu.be/zrCXNhY8XSE

Bank NPA #2: SDR, S4A, 5/25 Scheme, AQR, JLF, CAP, SARFAESI, I&B Code, Loan Waiver

  • In this session, we’ll understand the meaning of following terms:
  • Non-Performing Asset (NPA), Substandard Asset, Doubtful Asset and Loss Asset.
  • Special Mention Accounts (SMA),
  • Joint Lenders Forum (JLF)
  • Corrective action plan (CAP),
  • AQR: Asset Quality Review
  • 5/25 for Infra loans
  • SDR: “strategic debt restructuring
  • S4A: Scheme for Sustainable Structuring of Stressed Assets:
  • Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest  (SARFAESI) Act,
  • Insolvency and Bankruptcy Code, 2016, IBBI,
  • Farm loans: one time settlement (OTS) with haircut, Debt waiver vs Loan write off and Willful Defaulters

Youtube Link: https://youtu.be/Uese9dkgx-0

Bank NPA #3: Bad Bank “PARA”, RBI’s Windfall Profit Post-Demonetization, 4R4D

  • CEA Arvind Surbamanian believes that since the earlier ‘alphabetical soup’ of schemes (AQR, SDR, S4A, I&B Code etc.) has failed to solve NPA problem, and since 40% of the NPA is concentrated only in 60 firms, so better we create a centralized agency known as Public Sector Asset Rehabilitation Agency (PARA), which will work as a “Bad bank” and absorb the losses from the PSBs.
  • But where to get the money to absorb these losses? Subramanian suggests that the demonetization of Rs. 500, and Rs.1000 rupee notes will create windfall profit for RBI, from which, this bad bank endeavor can be financed. How far is his assumption valid? We’ll see in this video.
  • Economic Survey also warn against the moral hazard i.e. once NPA problem is settled, the Bankers may become complacent and again resume reckless lending. Therefore, systematic reforms are required to improve the governance and administration of PSBs, for this, Subramanian and others have suggested many reforms, such as 4R4D framework, Banking investment company (BIC), Bank Board Bureau, Indradhanush Roadmap etc. all of that is compiled in this last part of the NPA lecture series.

Bad Bank
Youtube Link: https://youtu.be/lFu-A27shRQ
Next Lecture: Classification of Banks, Merger of BMB & SBI Associated Banks