Businesses need to generate necessary capital for their functioning and further expansion purposes and loan finance is one of the major sources that every business need in order to survive todays market. Banks and other financial institutions provide loans at some interest rate to borrowers for a specified period of time and if the amount is not obtained or repaid by the borrower after 90 days of the time period then it will be considered as the non-performing asset. The rise in non-performing assets will only lead to slowdown economy of the country.
NPA leads to a reduction in cash flow of lender eventually leads to decrease in lending and increase in the rate of interest to cover their losses. The Higher rate of returns will affect the cash flow in the economy and will make it difficult for business to generate capital through loans, and also it will be difficult to repay back old loans.
Generally, in banking industry shareholders are interested in enhancing value of their investments through higher dividends and market capitalisation which is possible only when the bank posts significant profits through improved business which is possible if they have NPA rate in control.
The government is also considering the rise of NPA as a major drawback for the economy. As per the latest government data, public sector banks gross bad loans rose by over Rs. 1lakh crore in the first nine months of last fiscal year to Rs. 6.07lakh crore by end-December, from Rs. 5.02lakh crore at the end of March 2016. The government of India has formulated acts to control the growth rate of NPA. Every lender or borrower must know these acts before any loan transaction takes place.
Government Promulgated majorly these two acts:-
The Act empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court, through acquiring and disposing of the secured assets in NPA accounts with an outstanding amount of Rs. 1lakh and above.
The Act provides setting up ofDebt Recovery Tribunals (DRTs)andDebt Recovery Appellate Tribunals(DRATs)for expeditious and exclusive disposal of suits filed by banks / FIs for recovery of their dues in NPA accounts with an outstanding amount of Rs. 10lakh and above.The government has, so far, set up 33 DRTs and 5 DRATs all over the country.
In India, businesses are generally unable to pay their loans on time which creates a rise in NPA. In order to control the rise in NPA and maintain sustainable growth businesses should consider investment opportunities which have chances of favourable returns.