In the previous article, we covered the basics and impact of the NPAs. In this article, we will discuss the major causes of the accumulation of NPAs.
- Majority of loans are given to the projects that are viable. But, due to bottlenecks like delays in land acquisition, forest clearances among others, many projects remain non-starter. This leads to a situation when the project owners and promoters get debt-ridden and banks NPAs ridden. According to Raghuram Rajan, majority of NPAs are formed out of viable projects.
- Populism or Social banking : Many times the loans of , especially, the farmers are waived for populist considerations of vote banks.
- Priority Sector Lending (PSL) in which easy loans are given to the vulnerable sectors like agriculture, MSMEs etc. at a lower interest rates . A stipulated proportion of the bank credit need to be reserved for these areas.
- Crony Capitalism in which huge chunks of loans are made available to capitalists are ease.
- Regulatory delays in infrastructure projects. For instance, in the PPP model implemented so far, that is, Build Operate Transfer, promoters start at huge debt while also there is a high uncertainty in the projects.
- Evergreening of loans: An evergreen loan is one which doesn’t require principle amount to be paid within time limits.
- Losses in agriculture due to anomalies in monsoon. This makes difficult the return of loans by the farmers.
- Business failures.
- Lack of legal infrastructure resolve disputes.
- The asset and reconstruction companies have insufficient capital to resolve the NPAs.
- Poor recovery of receivables.
- Political interference in the decision making of PSBs. This leads to unproductive decision making regarding sanctioning of loans.
- Mechanisms like Corporate Debt Restructuring(covered in the next post) have proved to be counterproductive and piled up the NPAs.
In the next article, we will be discussing about the mechanisms in place to deal with this menace.