Banking Test 2

Non-performing assets have been one of the most significant and persistent challenges confronting the Indian banking system over the past decade and more, eroding bank profitability, constraining fresh lending, and requiring large capital infusions from the government to maintain public sector banks' minimum regulatory capital ratios. A loan account is classified as a non-performing asset when the borrower has failed to pay the contracted interest or to make the scheduled repayment of principal for a period exceeding ninety days, with the account then being further classified as a substandard asset, a doubtful asset, or a loss asset depending on the length of time it has been in the non-performing category and the likelihood of recovering the outstanding dues. The accumulation of large stressed assets in public sector banks, particularly in the infrastructure, power generation and distribution, telecom, steel, aluminium, and real estate sectors following the investment boom of the late 2000s and the subsequent slowdown in project completion and revenue generation, severely eroded the capital base of several major public sector banks and constrained their ability to extend fresh credit to productive sectors of the economy at a time when credit demand from the private sector was also weak. The Insolvency and Bankruptcy Code enacted in 2016 created for the first time a comprehensive, time-bound, and creditor-friendly legal framework for the resolution of corporate insolvencies, allowing lenders to refer defaulting borrowers to the National Company Law Tribunal and either restructure the defaulting entity under a resolution plan approved by the requisite majority of creditors or liquidate it and distribute the proceeds among creditors in the prescribed order of priority. The code established Insolvency Resolution Professionals as licensed intermediaries to manage the process under the supervision of the Insolvency and Bankruptcy Board of India. Resolution of large stressed infrastructure and industrial accounts through the Insolvency and Bankruptcy Code process has resulted in meaningful recoveries in some high-profile cases, though the process has frequently exceeded the original 270-day time limit due to legal challenges, judicial appeals, and the complexity of restructuring large multi-lender accounts. Asset Reconstruction Companies, which are licensed by the RBI and regulated under the SARFAESI Act, purchase non-performing assets from banks at a negotiated discount to the outstanding dues and attempt to recover value through restructuring, enforcement of security interests, sale of assets of the defaulting borrower, or conversion of debt into equity and subsequent sale. Adequate provisioning for non-performing assets, as prescribed by the RBI under its prudential norms, reduces banks' reported profits and distributable net worth and constrains their capacity to pay dividends to shareholders, but is essential to reflect the true financial position of banks and to build up reserves against credit losses that may crystallise when the recoveries from non-performing accounts are eventually determined.