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[Music] hello and welcome to yet new investment Academy today we are going to discuss about NBA's that is non-performing assets in the last three years you must have heard a lot about NPS in this video we will try and understand what are NPS there are classification what are the causes of these non-performing assets and how are they impacting the Indian banking system and what are the steps being taken by government to tackle this problem so first is what are NPS a non-performing asset is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days or more a bank lends money in form of loan and if the person or form is not able to give back the interest or principal amount for 90 days then bank puts such loan as non-performing now it is classified into four parts first is standard assets a standard asset is one in which the borrower fails to make repayment regularly and it is not on time second are substandard assets a substandard asset is one which has been non performing asset for a period not exceeding 12 months the third is doubtful assets a doubtful asset is one which has been NPA for more than 12 months and fourth is loss assets a loss asset is one where the loss has been identified by the bank through the internal or external auditor or by the central bank inspectors mostly assets which are NPA for more than 36 months are automatically considered as loss assets these assets are mostly written off by subtracting any recovery value of the security which has been held by the bank now we will discuss causes of these NPS first is wilful defaulters a wilful defaulter is a person or organization which has defaulted in meeting its loan application or repayment obligation to the lender like bank even when it can honor these obligations so one of the best example of willful default is Kingfisher airline these are most dangerous form of NPS and usually accompany criminal proceedings against the defaulter second most common industrial crisis it is one of the external factor affecting NBS in the country industries depend on banks for fulfilling their requirement on funding various of their projects in case of crisis in industry companies may find it difficult to pay back their liabilities which puts them into NPA zone big reason for increasing NPS in India in last few years was very slow growth in capital goods sector such as metals engineering infrastructure etcetera top NPA companies identified by RBI which means these companies have highest loan default against them out of them tough for companies bush and steel SR steel bush and power and steel and Monnett is part all our steel producers and have aggregate loan default of more than rupees 1.5 lakh crores and then there are infrared engineering companies as well such as lanko infra era infra engineering and JP infra which defaulted as well now NPS of these kind of companies become good ones industry sector comes out of recession third is lenient lending norms lenient norms by the lender is also one of the prime reason for rising NPS over estimation of financial status and credit rating by banks for famous industry names are one of the reasons of NPS - am tech autumn fits in this category where both credit rating agencies and Bank overestimated their creditworthiness fourth is credit distribution mismanagement no misuse of funds by the borrower's also leads to NPS like some borrowers bribe the bank officials and get the loan approved with the sole intention of default clearly near of Modi company falls under this category now let's understand how are these NPA's impacting the Indian banking system the financial stability report of 2017 released by RBI states that India's gross NPA's was at nine point six percent this figure is the sum total of all stressed assets held by lending institutions in the country including cooperative and small banks in addition to government and private banks India has second highest ratio of NPS among the major economies in the world only Italy with sixteen point four percent and PA has more stressed assets China whose economy growth is largely fueled by loans has only one point seven percent NPS according to IMF now according to latest figures of December 2017 this figure of nine point six percent has actually increased to ten point four percent not dissecting this ten point four percent figure further among Indian banks IDBI Bank has the highest NPS and tops the list of lending institutions with highest exposure to NPS at twenty four point one one percent Indian Overseas Bank has 23.6% NPS my fellow private lenders such as kotak mahindra and SD FC fare much better with only two points five eight percent and one point two four percent draws NPS respectively State Bank of India which has the most stressed assets in absolute term has gross NP a ratio of around ten percent now let's discuss how these NPS are impacting our economy and the industry first is profitability and P is put huge impact on the profitability of the banks as they stop to earn income on these stressed effects on one hand and they have to keep aside some capital to make sure that there are no liquidity impacts for the depositors because of these probable NPS default and this is called provisioning of assets each type of NBA has different provisioning ratio as prescribed by RBI examples substandard NPA has provisioning ratio of 15% which means Bank has to keep aside 15% value of these NP assets as liquid assets with them and this ratio increases as NPA category worsens and these capital which they keep separately are considered as their liabilities so this provisioning badly impacts the overall bank's profitability and because of this many of banks especially puce PSU banks are showing huge losses in their recently concluded quarterly results second is asset contraction or credit contraction the increased NPS are putting pressure on recycling of funds and reduces the ability of banks for lending more and thus results in lesser interest income for the bank it contracts the money stock which may lead to economic slowdown even it also is adding too much scrutiny in corporate loan dispersal by banks which is bringing inefficiencies in the system and is taking some of the industries to the slowdown third is liability management in the light of high NPS to improve their profitability banks tend to lower the interest rates on the deposits on one hand deposits like f DS and Savings Bank etcetera and likely to Levi's higher interest rate on new and old loans to sustain their net interest margin so this is net interest margin so this may become hurdle in smooth financial intermediation process and hampers it's business as well as economic growth and this is the biggest reason of slow reaction of many banks in decreasing their loan rates even though RBI decreased repo and reverse repo rates few months back next point is that it may impact the public confidence in banking system as well because it shakes the confidence of public in the soundness of banking system increased NPS may even pose a liquidity issues in the future and already because of this NPS the banking stocks are taking a huge type thus this increased incidence of NPS is not only impacting the performance of the banks and the banking system but overall economy as well and NPS is actually one of the big reasons of decrease in GDP in last few quarters as well now the last we will discuss about the steps being taken by government to tackle this and be a problem while the increase in NPA is problematic its increase since 2015 after RBI's asset quality review in 2014 is a good sign it means banks are acknowledging and peace than hiding them the resulting recognition of true asset quality at banks largely explains the increase in NPS during these last three years and even as a reporting of NPS rose since 2015 RBI suspected that some banks were still under reporting them and in April last year RBI asked all banks to reflect in their notes if their NPS differed from the definition of regulators as a result some of these banks were heavily fined for under reporting bad loans and there are many things which government has done in last few years to solve this problem first is Banking Regulation Act is amended to give RBA more powers to monitor bank accounts of big defaulters amendment in the banking law will enable setting up a committee to oversee companies that have the highest or the biggest defaulters of loans and that will help introduction of NPS hopefully to recover outstanding loans a slew of legislations including the big one IBC that is insolvency and Bankruptcy Code was passed by the Parliament which helps in easy liquidation of the defaulters these two acts were amended that recovery tribunals were also set up to fast-track proceedings of liquidation amendments are aimed at faster recovery and resolution of Baghdad by banks and financial institutions and making it easier for asset reconstruction companies to function along with this new bankruptcy law which came into effect earlier this year and amendments will put in place an enabling infrastructure to effectively deal with these non-performing assets in Indian banking system last is the RBI this February announced a complete overhaul of the asset resolution process setting a strict timeline and criteria of reporting NPS and resolving them so there's lot of activity by the government which is happening in this area and hopefully things should start improving in next few years that is all we have on this topic of NPS if you have any question on NPR topic please do write in the comment section below and do not forget to subscribe to our channel for more such videos have a great time ahead J hint