IBPS Test 7

Non-performing assets have been one of the most persistent and serious challenges facing the Indian banking sector, particularly public sector banks, over the past decade. A bank loan is classified as a non-performing asset when the borrower fails to make interest or principal repayments for a period of ninety days or more, signalling that the loan may not be fully recovered. The accumulation of large NPAs impairs a bank's profitability, constrains its ability to lend further, and in severe cases can threaten its solvency, making NPA management a matter of systemic importance for financial stability. The origins of the current NPA crisis in Indian banking can be traced to the credit boom of the mid-2000s when banks, particularly public sector banks, aggressively extended credit to large infrastructure and industrial projects during a period of high economic growth and optimism. When the global financial crisis of 2008 and subsequent domestic economic slowdown materialised, many of these projects faced cost and time overruns, demand shortfalls, and financial stress, leading borrowers to default on their loan obligations. The practice of ever-greening, through which banks extended fresh loans to stressed borrowers to enable them to service existing loans and avoid NPA recognition, masked the true extent of the problem for a period. The Asset Quality Review conducted by the Reserve Bank of India in 2015-16 forced banks to recognise stressed assets more honestly, leading to a sharp jump in reported NPAs. The Insolvency and Bankruptcy Code, enacted in 2016, was the most significant legislative response to the NPA crisis. The IBC created a time-bound resolution framework for insolvent companies, providing creditors including banks with a structured mechanism to recover value from defaulted borrowers. Cases are adjudicated by the National Company Law Tribunal, and the IBC mandates that resolution proceedings be completed within a specified time period to prevent value erosion. Resolution applicants submit plans for revival of the insolvent company, and if viable resolution is not achievable, the company proceeds to liquidation with proceeds distributed according to a prescribed priority waterfall that places secured financial creditors ahead of other claimants. The IBC has substantially improved India's insolvency resolution framework, as reflected in India's significantly improved ranking in the World Bank's Ease of Doing Business index on the resolving insolvency indicator. Banks have recovered significant amounts through IBC proceedings, though the recovery rates as a proportion of admitted claims have often been lower than desired, particularly in cases where asset values had deteriorated substantially before resolution. Complementing the IBC, the Asset Reconstruction Companies framework allows banks to sell their NPA portfolios to specialised entities that focus on recovery and resolution. The government has also recapitalised public sector banks through infusion of capital to restore their capital adequacy and lending capacity. Prompt Corrective Action framework of the Reserve Bank places stressed banks under restrictions on lending, dividends, and expansion until their financial health improves. Bank consolidation through mergers of weaker banks with stronger ones has been another strategy to address NPA challenges in the public sector banking system.