How banks survive NPAs?

How Banks survive the NPA crisis?

NPA (Non Performing Assets) or bad loans are biggest problems for the banks in India. The problem is so big that in recent months, India’s 4th largest private bank, Yes Bank went through trouble times. But the good news here is that this bank is performing better than past. How this happen? How government and other banks helped in reviving YES bank? In general, how other banks can deal with NPAs? And what effect does it have on general public? Let’s find out!

How Banks Revive?

Whenever a bank in India is verge on closing, government and RBI come to it’s rescue. This is done because government don’t let any bank to die. Also according to the rules and regulations of RBI, it is specifically the duty of RBI to prepare scheme of reconstitution or amalgamation.

To save any bank, their always requirement of funds first. But from where the money comes? In case of Yes bank,it needed around 15k-20k crore to function. Then, Central government launched Yes Bank reconstruction scheme in which SBI purchased 49% shares. On government’s say, ICICI Bank and HDFC Bank invested 1000 crore each. Also Kotak Mahindra Bank and Axis bank invested around 500-600 crore in Yes bank.

FPO- Yes bank then to meet funds requirement launched FPO ( Follow-On Public Offering) to raise 15k Crore. This FPO was successful and bank raised 14,200 crore. The shortfall of 800 crore was funded by SBI.

How to Recover NPAs?

To recover money from the companies who didn’t paid back loans, there are different methods. One of them is to sale the assets own by defaulter companies. Some money will recover from their.

Yes Bank also did the same. It auctioned the assets of Avantha Group and RHC, and raised 1000 crore from their. Yes bank also took possession of Reliance Center. And sold Essel Group Company’s assets and recover 1500 crore from them.

Another method is to sale the company who defrauded the bank to any other company. And amount from sale of company should be treated as recovery amount. Biggest loan default of India is amounted at 56,000 crore, which was done by Bhushan Steel. And to recover that amount, Bhushan Energy was sold to Tata Steel.

One more method is to deal with Asset Reconstruction Companies. Banks who do not want to involve much in recovering from defaulters, contact with Asset Reconstruction Companies. With them they make contract and take a certain percentage of amount and all the recovering work is given to these companies.

For example, A bank has 30,000 crore NPAs. It then contacted with one such company and took 40% of that NPA amounting to 12,000 crore. After this bank has no work of recovering. It is then companies responsibility to recover from the defaulters.

How NPAs effect Common Man?

In general we only know that when Yes bank crisis happened, common man has only one problem with it. Common man was not allowed to withdraw more than 50,000. But this is not the only effect. When banks have high NPAs, they make loan interest rates high and FDs interest rates low. And through that margin they try to balance their NPAs.

Basically these NPAs have long time and indirect effect on common people.

How to check which is good bank?

Best way to check which bank is good bank and to measure their performance to invest money is to check their Gross NPA%. If a bank has increasing or more NPA % then this is not good performing bank and not good to invest money.

Also, always invest your money in different good bank accounts.

One can also check the quarterly NPA% of banks to measure the performance of banks.