Non- Performing Assets (NPAs) are loans which haven’t been recovered by the banks. This issue has been plaguing the banking sectors as it results in a huge decline in their profits.
Below are a few jargons which will help you understand the concepts revolving around NPAs:
1. Public Sector Banks (PSBs)
PSBs are banks where the Government holds a majority portion of the shares and thus enjoys maximum ownership in the bank. India has 21 PSBs which include State Bank of India, IDBI Bank, Allahabad Bank and so on.
2. Bad banks
Bad banks refer to an institution which buys stressed assets and bad debts from banks. This helps the bank clear their balance sheets off these debts.
Bailout refers to helping a defaulting company by providing funds. The Government or a bank or even a company bails out the defaulting institution to settle certain non-recoverable loans in order to improve the financial status of the institution. In the 2008 recession, US government had bailed out several companies.
4. Bail in
Bail in is the completely opposite of bailout. Its when the government uses external means to fund the defaulting company, usually taxpayers money.
5. Debt restructuring
Debt restructuring is a method used by defaulting companies to rework the terms of the debt agreements to reduce the burden of debts for the company. There are many types of this method. One is ‘corporate debt restructuring’ where a non-obligatory compromise is worked out between banks and defaulting companies on how the loan is going to repaid. Another is ‘strategic debt restructuring’ wherein banks accept loan payments in the form of equity from the defaulting company.
6. Wilful defaulters
The debtor who is willingly defaulting on loan repayment despite having the capability of repaying the loan is known as wilful defaulter. In recent times, United Bank of India had called Vijay Mallya, the King of Good Times, a wilful defaulter.
7 Asset management companies
First, there are private asset management companies (PAMC) who evaluate the stressed assets and draft a resolution approved by banks to revive the defaulting company and make it functional again. Then, there are national asset management companies which try to do the same at the national level. Reserve Bank of India has been trying to float the concept of PAMC in India to resolve NPAs.
Write off means wiping off non-recoverable loans from the bank records as such loans are no more an asset to the bank. Usually, the bank tries different means to try to recover the money from the defaulter like taking over their assets like cars, house, etc. However, if none of it is recoverable the bank suffers a loss.
Recapitalisation is a financial strategy used by a defaulting company to change its financial structure to help improve the company’s financial standing. Sometimes, the Government does it for banks generating low revenue due to high number of NPAs (Non-Performing assets). The Government infuses funds in the banks to help them carry out banking activities.
10 One-time settlement
This refers to a speed loan recovery measure where the lender allows the debtor to pay less than the amount owed. This step is used mostly for non-performing assets.
11. Interim Resolution Professionals (IRPs)
IRPs are professionals appointed by the government to take charge of the defaulting company. These professionals go over company’s assets and finances to determine the viability of the business and help it get back on track.