Question

Discuss how banks can reduce non-performing loans (NPLs) and minimize the losses due to loan defaults. (in 500words)

Answer 1

Non performing loans (NPLs) or non performing assets (NPAs) are those are those assets for the banks which have ceased to generate income for the bank, which earlier did so by paying interest to the bank to service the loan received from the bank.

Primary reasons which are identified for the spurt in the amount of NPLs are

a) Aggressive lending

b) Wilful default

c) Corruption, and

d) Economic slowdown

To tackle the problem of rising NPLs, the banks and the other equivalent authorities can adopt the 4R policy which stands for Recognition, Resolution, Recapitalisation and introduction of necessary Reforms. This is used in the cases of existing NPLs held with bank.

further to ensure that banks do not go into the wrong way again, it has to ensure certain provisions and precautions before disbursement of loans. It shall encourage the practice of qualitative assessment of financial statements and look for any unhealthy developments in the numbers as compared to the previous years. The banks shall employ certain professionals who can deep dive to understand the nature of businesses and assess the future cash flows generation capacity of the projet. The amount of NPLs can be reduced by continuously monitoring and taking precautions while levying filters before approving the loan. The bank must try to get early symptoms of the sickness and resolve early.

Resolving early gives the bank certain advantages,

1) Reutilisation of funds

2) Tax relief due to write offs, and

3) Saving of time and funds to be deployed for legal proceedings