A Critical Review of NPA Management: Challenge for Public Sector Banks

Abstract

The economic liberalization and globalization policy of the government in the nineties have led to economic growth and financial stability of the country, but it also brought huge increment in bad loans in the banking sector, especially public sector banks. The coronavirus pandemic and the subsequent lockdown had a devastating impact on Indian banks which were already struggling with the rising bad loans. The 6-month loan moratorium and the Supreme court's order barring banks from classifying loans as NPAs for one year will lead to a tremendous increase in NPA and the biggest challenge for banks in 2021. The bank's asset, classified as NPA, ceases to generate income to the bank, and banks have to make provision for NPA. Therefore NPA is a double-edged razor, damaging the profit, weakening the capital structure and reducing the bank's rating. NPA poses a big threat to the macro-economic stability of the Indian economy. NPA is not just about recognition; the emphasis should be on resolution and recovery. The government and RBI had taken steps to bring transparency in the banking sector. This paper gave an overview of NPA's strenuous problem in the pre-COVID times faced by the public sector banks and the steps taken by the government to control them. The author used secondary data in the form of existing reports, published articles, literature and data available on the public domain.