Non Performing Assets problem in India

In the last few years, NPA problems in India have grown significantly. According to the RBI, the total value of NPAs stood at 9.8 percent of loans at the end of FY2014. The economic fluctuations of 2008-09 created avenues for possible default by individuals as well as institutions. However I feel the entire blame cannot be attributed to the economic cycles. The rating agencies and ARCs play the most critical role in assessing loans and credits and hence potentially alleviating NPA problems. But the government has not effectively encouraged the use of rating agencies. Consequently, the effectiveness of credit risk assessment and credit administration has come into question. In general, credit rating agencies provide independent assessment of default risk of an issuer on a debt instrument. But the current regulatory framework requires banks to have their own credit risk assessment framework. The reliance on external credit rating is limited to capital adequacy computation.

• There is evidence of lack of rigour in the loan appraisal systems followed by the banks which is critical for identifying possible NPAs in advance. Rating agencies provide a better appraisal system.
• CRAs help the general investors to gain knowledge about the company they are interested to invest in. This enhances liquidity in the market as reduced information asymmetry leads to confidence in investors.
• For companies which don't trade in the market, the rating agencies can provide significant information to enable quality decision making by the banks.
• A standard rating system would ensure that only the most deserving entities get the debt from the market.
• It can help the corporates to explore alternate source of funds.
• Corporates can optimally price their bonds and equity issues.
• CRAs can provide a forward looking market based credit rating which would help the system to reduce the burden of stressed assets and potentially reduce NPAs.
• CRAs can provide a dynamic rating mechanism which can help the lenders to assess the credit risk in advance and the opportunity to take steps to mitigate those risks.

• Reducing excessive regulatory interference
• Provisioning of regulations for sale of assets
• Empowering ARCs through building restructuring capabilities
• Addressing the issue of shortage of capital
• Reducing barriers to foreign investors
• Improving the effectiveness of the asset resolution mechanism