Non-Performing Assets (NPAs) have long been a critical concern for banks worldwide, affecting financial stability and economic growth. In the current economic landscape, both Indian and global banking sectors face challenges related to rising NPAs, necessitating a closer examination of their causes, impacts, and potential solutions.

An NPA refers to a loan or advance where the principal or interest payment remains overdue for a period exceeding 90 days. Such assets cease to generate income for banks, leading to financial strain. The Reserve Bank of India (RBI) classifies NPAs into sub-standard, doubtful, and loss assets based on the duration of non-payment.

In recent months, Indian banks have witnessed a surge in NPAs, particularly in personal loans and microfinance sectors. For instance, RBL Bank reported a significant increase in non-performing loans, leading to a 5.8% drop in its shares. Similarly, IDFC First Bank experienced higher delinquencies in its microfinance segment, resulting in a sharp decline in third-quarter profits. These trends indicate growing asset quality stress within the Indian banking system.

Globally, banks are grappling with rising NPAs, especially in the commercial real estate sector. In the United States, the number of borrowers facing a second default on commercial property loans has reached its highest level in a decade. This trend raises concerns about the "extend and pretend" practice, where banks modify loans to provide temporary relief, potentially masking systemic risks.

Several factors like economic slowdown, overleveraging, inadequate Risk assessment are the main factor to contribute to the increase in NPAs;  due to Global economic uncertainties, exacerbated by geopolitical tensions and pandemics, have led to reduced business revenues, impacting loan repayments causes Economic Slowdown. Overleveraging is also a factor where Borrowers taking on excessive debt without adequate repayment capacity have heightened default risks. Lapses in due diligence and credit appraisal processes have resulted in the sanctioning of high-risk loans.

The surge in NPAs has far-reaching consequences for Economy:

• Bank Profitability: Increased NPAs necessitate higher provisioning, eroding banks' profitability.
• Credit Availability: Banks become cautious in lending, leading to reduced credit flow to productive sectors, thereby hindering economic growth.
• Investor Confidence: Rising NPAs can lead to a decline in bank stock prices, affecting investor sentiment and capital inflows.

Addressing the NPA challenge requires a multifaceted approach:

• Strengthening Credit Appraisal: Banks must enhance their risk assessment frameworks to ensure prudent lending.
• Regulatory Oversight: Central banks and regulatory bodies should tighten supervision to detect and address early signs of asset quality deterioration.
• Resolution Mechanisms: Implementing effective insolvency and bankruptcy frameworks can facilitate timely resolution of bad loans.

The escalating NPAs pose significant challenges to both Indian and global banking sectors. A concerted effort involving robust risk management practices, stringent regulatory oversight, and efficient resolution mechanisms is imperative to safeguard financial stability and promote sustainable economic growth.

The writer is an Assistant Professor, Ranchi University. Views are personal.