Non-performing Assets of Indian Banking: An Evolutionary Journey

This paper narrates the story of the evolutionary journey of non-performing assets (NPA) in the Indian banking sector. Three distinct phases of the intertemporal behavioral of NPAs of the Indian banking sector can be discerned. First, since the initiation of financial sector reforms till about the beginning of the North Atlantic Financial Crisis (NAFC), NPAs showed a consistent downward trajectory. Second, during 2008–09 through 2017–18 the NPAs showed a distinct spurt. Third, since then, NPAs marked by a downward trend till 2019–20 until the economic disruptions caused by Covid 19. Contrary to the popular perception of treating the second phase of rising NPAs as one emanating exclusively from governance issues in public sector banks (PSBs), four factors have been identified: (a) falling commodity prices; (b) regulatory forbearance; (c) initial exuberance in infrastructure projects punctured by a downward phase of business cycles (leading to substantial debt accumulation of select big corporates); and (b) governance failure in select PSBs. Moving forward, while the pandemic and some of the associated policy measures could reverse the recent downward trends in NPA, more durable policy initiatives like bankruptcy reforms are expected to make significant positive changes in the NPA situation of Indian banks.