NPA problem is making all financial institutions from public banks to RBI scratch their heads but the issue is far from getting resolved. The high number of NPAs has the ability to trap the economy in a never-ending vicious debt cycle.
Let’s try to understand how this vicious cycle works:
1. Banks give out loans to businesses
In order to increase their profits, the state-owned banks try to credit as much money as possible. In the quest of achieving this goal, the banks started giving out loans irresponsibly to big corporate players. These loans are sanctioned without evaluating the capability of the company to repay the loans.
In the end, the banks are left with a huge pile of unpaid loans which result in declining their profits. But however, the banks alone are not responsible for the entire debt crisis.
The government also shares a part of the guilt. How? The government officials allocate natural resources and licenses to steel, power and telecom companies in return for bribes. And it is not very surprising to see these companies top the list of biggest loan defaulters in our country.
2. Businesses start defaulting on loans
Several incompetent companies started defaulting on their loans as they couldn’t generate enough profits. While there are few who cannot pay the debts, but then there are others who deliberately do not repay the loans despite the resources. These companies have the sole intention of ripping off banks and are termed as wilful defaulters. And most of the times funds acquired by such companies through loans are used for purposes other than what is mentioned while seeking the loan.
This can be evident in the Vijay Mallya case. Mallya took loans worth Rs. 7200 crore from various Indian banks. Despite the unpaid loans, he continued to live a lavish life. United Bank of India had called him a wilful defaulter
3. Businesses borrow loans from multiple banks
To cover up for the losses and pay up for their previous unpaid loans, businesses land up taking more loans from multiple banks. Despite a poor financial status of these companies, banks sanction the loans on demand without any hassle.
Banks don’t seem to realise their mistake until these companies turn their backs. And by the time these bad loans are unmasked there is little to no hope left for the recovery. The banks need to be sterner and need to better research the clients and companies to while granting loans.
4. Failed businesses lead to failed economy
Reportedly public banks grant loans to such an extent that these unrecoverable bad loans are bringing banks on the verge of bankruptcy. The ever-growing amount of NPAs has put tremendous pressure on Indian banks while hampering their capacity to lend money to businesses. With no support from banks, the genuine companies who are in dire need of loans are suffering needlessly leading to an overall decline in the economic growth of our country.
5. Failed economy lead to more NPAs
If businesses fall due to lack of access to economic aid, they are more likely to default on their pre-existing loans adding more bad loans in the financial records of the banks. This has given rise to a kind of situation where the previous bad loans are becoming the major reason for the growth in current bad loans.
If the problem persists and the economy keeps falling soon we may see banks repeating their money lending patterns but this time they will be forced to save companies from going bankrupt in an effort to save the economy as a whole.
Companies, on the other hand, will most probably take advantage of the situation. The number of wilful defaulters and business defaults will presumably increase bringing the economy to the same state as before turning the existing NPA crisis into a vicious debt circle.
The government has foreseen the crisis and has introduced several aggressive policies to tackle the NPA problem which is a good sign but the efforts are still at a nascent stage and it can take a while before the success of these policies can be judged.