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Non-Performing Assets (NPAs) are a widely discussed and researched topic nationally and internationally. NPAs have been the economic concern in India for more than two decades now. In India, NPAs are assets that fail to generate income through the means of interest payment and/or principal repayment ‘past due’ for a specific period.[1] The following essay looks at the efficiency of the mechanisms adopted to solve the issue of NPAs and growing corporate debt.

The reasons for NPAs are debatable, but they can broadly be divided into two factors. First, internal factors such as diversion or misuse of funds, cost/time overrun while implementing projects, inefficient workforce, and so on. Second, factors such as industrial downturn, natural calamities, recession in other countries, national and international political unrest, regulatory changes, wilful default, etc. are external factors. Increase in NPAs results in lack of liquidity and a drop of lending capacity of the banks resulting in the downfall of the demand for credit. Overall, NPAs give rise to a situation of illiquidity and hammering the working capital cycle within the economy.[2] Reserve Bank of India and Government of India collectively has undertaken various measures to minimise and eliminate the NPA problem. The banking crises of the 1990s were addressed by reforms recommended by Narasimham Rao Committee, economic liberalisation, and so on. At present, Asset Quality Review, Corporate Debt Restructuring, Strategic Debt Restructuring, 5:25 Scheme for Flexible Refinancing Infrastructure, Scheme for Sustainable Structuring of Stressed Assets, Joint Lender’s Forum, Insolvency and Bankruptcy Code, The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act and Indradhanush Scheme for banks are few of the measures adopted. Broadly, recapitalization, debt restructuring and advance provision for stressed assets are the features of the measures adopted since the 1990s. The implementation of these has resulted in the loss of bank’s income through interest and writing-off of the principal amount.[3]

In India, the bulk of NPAs is concentrated in public sector banks (PSBs); who also are the primary lenders to the steel, telecom, and airline industry. Increase in NPAs is directly proportionate to the decrease in the lending capacity of the banks. According to the Economic Survey 2016-17, the PSBs in India have adopted a standard way to tackle the problem of NPAs. Banks have become risk-averse with a motive to protect their capital.[4] On-one-hand, it resulted in a steady decline in the total corporate sector credit from the banks and on-the-other-hand industries finds it difficult to function efficiently due to the cash crunch in the economy. At large, NPAs have disturbed the credit quantum, restricted the recycling of funds and leading to asset-liability mismatch. In 2017 India’s biggest lender State Bank of India and its associate banks merged resulting in NPAs of approximately Rs1,63,336 crore.[5] SBI and its associates wrote-off Rs27,574 crore in 2016-17.[6] Also, SBI adopted debt restructuring and merger with its associate banks for strengthening its profits. The mechanisms adopted to solve the problem of NPAs were recapitalisation, debt restructuring and making advance provisions which were proven to be time-consuming and less effective.  

On the contrary, a public-sector undertaking (PSU) Air India (AI) owes approximately Rs28,000 crore to SBI and it has been under the financial debt for more than a decade.[7] India’s national carrier AI has a total debt of around Rs52,000 crore which consists of Rs22,000 crore as aircraft loan and the remaining being working capital loans and assets. The reasons for the mounting debt are both internal and external. There was a delay in fleet acquisition which was later acquired at a debt amount of Rs41,000 crore. Aircrafts were acquired without taking into consideration the preparedness of the labour force. Therefore, there was underutilization of the total acquired fleet. Approximately, 95 routes out of 189 routes were incapable of meeting their cash cost, and around 80%-90% of the international routes were suffering losses. Furthermore, the lack of transparency and clarity in international bilateral strategy and increase in private airline participate further deteriorated the financial position of AI.[8]

This issue was tackled majorly in three realms, expanding the fleet size of Air India, enabling merger of Air India and Indian Airlines and restructuring of debt by reducing the interest rate and capital infusion. The burden of repayment of debt and its interest added to the financial burden of the company. In 2007, AI was merged with Indian Airline with an objective of making profits and gaining higher market share in the airline industry. But this misfired the objective of the merger as there were post-merger managerial issues of promotion, compensation, labour strike resulting in poor coordination of the internal management. Additionally, the Government of India further decided to expand the fleet capacity of the merged entity; which pushed the entity more also into debt. Eventually, the government agreed to restructure the debt by reducing interest rates and recapitalise in specific intervals. However, this too failed to be a valid measure of the financial liability of AI.[9]

In a nutshell, it can be seen that the measures adopted to solve the problem of NPAs of banks and increasing debt of the corporate are similar and these measures failed to address the issue of burden of debt on the economy as a whole. This results in the growing concern over the effectiveness of the measures.  As per the Economic Survey 2016-17, Government further plans to set a separate agency i.e. ‘Public Sector Asset Rehabilitation Agency’ (PARA) primarily to restructure and recapitalise debt of the public sector banks. This brings to a question of the success of a new agency with the function similar to the measures adopted till now.


[1] Dr.N.Nagaraja and Naveen Kumar P. An Analysis of Non- Performing Assets of Commercial Banks in India. International Journal of Engineering and Management Research (2015); 824-831

[2] Mohammed Arif Pasha & T. Srivenkataramana. Non-Performing Assets of Indian Commercial Banks: A Critical Evaluation. AN INTERNATIONAL JOURNAL FROM M P BIRLA INSTITUTE OF MANAGEMENT (2014); 3-10

[3] Rajeswari Sengupta and Harsh Vardhan. Non-performing assets in Indian Banks: This time it is different. Economic and Political Weekly, 2017.

[4] Government of India, Ministry of Finance, Department of Economic Affairs Economic Division. Economic Survey 2016-2017

[5] Hitisha Jain. Mega merger: Bad loans of 5 associate banks more than half of SBI's. Zee Business: http://www.zeebiz.com/companies/news-mega-merger-bad-loans-of-5-associate-banks-more-than-half-of-sbis-14583

[6] PSU banks wrote off Rs2.49 trillion of loans in 5 years: Finance ministry. Live Mint: http://www.livemint.com/Industry/K5ksdPo1PTixe5N1dxXRYN/PSU-banks-wrote-off-Rs249-trillion-of-loans-in-5-years-Fin.html

[7] Tarun Shukla. Air India may be listed on exchanges with banks holding strategic stake: http://www.livemint.com/Companies/n7xzE2jnSclJK8tUIiUgsL/NDA-considers-ownership-rejig-at-Air-India.html

[8] CAPA India. Decisive action on Air India’s future assumes urgency in light of foreign airline investment; 2013.

[9] Kannan Kasturi. Privatisation Is Not Reform. Economic and Political Weekly 2017: 18-22

Cover image source: Rishank Pandey

Body image source: Jagran


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Written By Dhanashree Gurudu

She is a M.A Regulatory Governance post-graduate from Tata Istitute of Social Sciences, Mumbai.

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