As Per Financial Stability Report, NPA of banks may increase to 9.9 % by September 2020 which 0.6% more from the Previous Year.

As Indian banking sector is progressively striving towards integrated approach to risk management. The Non-Performing Assets (NPA) of commercial banks has managed to recover Rs. 400,000 crore in FY2019, which records to the highest recovery rate in preceding four years. Banks have adopted the guidelines under the International banking supervision accord of Basel II.

According to the Financial Stability Report, the NPA of banks may increase to 9.9 % by September 2020 which 0.6% more from the previous year. The Indian financial companies, according to S&P Global Ratings credit, are amongst the largest borrowers. 

Since, more than 64% of the total assets in the financial system comes from the banking sector, it shows the predominance share of sector in the system. This data agitates the financial system even more amid the unprecedent outbreak of Covid-19. 

In the latest report of IMF, it said India’s key banks appear resilient, but the system is subject to considerable vulnerabilities. 

What are These Vulnerabilities? 

To understand this, we must know what is testing the resilience of the banking system, and holding back the growth, as stated in the report, the high non-performing assets aren’t the only cause, the slow deleveraging of corporate balance sheet which declines the asset quality and higher provisioning needs adds more problems to it.

  • As banks are the spine of economy especially for the developing countries, the need to analyse the prevalent challenges become imperative to know the repercussion of every issue. 
  • The sector not only plays the catalytic role in the establishment of economy but also in sustaining the future growth. But when it fumbles, the fall of economy is definite. Let’s understand the challenges of Indian Banking System.
I. Asset Quality
  • The persistent rise in the bad loans are contributing the slowdown in the economy. When these loans are not repaid to the bank it results to Non- Performing Assets.
  • At present, Net NPAs accounts to 10.9% of the total loans in the banking system (including the stressed loans) but according to IMF, 36.9% of the total debt in India is at risk and catch here is Indian banks have capacity to absorb only 7.9% loss. If these debts are not paid off then bank will shrink to the bottom.
II. Capital Adequacy

Capital adequacy are basically the money kept aside to meet uncertainties which can occur in the economy. This provision is kept only for the purpose of meeting the unexpected downturn.

Hence, it cannot be used for other purposes due to which the banks have lower capital available for its operational and functional activities.

  • If the Capital Adequacy Ratio is not enough, the banks have to lend money or use depositor’s money to carry on its functions. 
  • If bank fails to get expected return on the money invested, the bank gradually fails to shore up their capital due to which it fails to meet the minimum capital requirement set by the RBI. In that case, it becomes worrisome because this could lead into debt-trap.
III. Employee and Technology:

With advent of high technology, the employee with more experience are getting easily replaced by the young employee. As a result, it is creating the substantial vacuum in the middle and senior level due to which decision-making process is getting adversely affected. 

  • It is not only hampering the efficiency of the banking system but also resulting in resistance to change because of that senior level employees are not welcoming the technology which reduces the scope of product enhancement.
IV. Dependency on the Government

As public sectors rely on the government for injecting the money into their system these banks are unable to raise their own capital.

So, they are hostage of their own misfortune. At one side, the banks are responsible to take robust measures to stabilize the economy. On the contrary, public sectors face tough time doing capital infusion.

As the prevalent crisis affects both the demand and the supply in the economy, and even after the situation hits normalcy, the demand will continue to suffer because:

  • With businesses being shutting down, consumers will curtail the spending throughout the year. Consequently, this will bring higher corporate layoffs resulting the banks to make downward spiral till it touches the floor. 
  • It has been speculated that the real impact of the slowdown will be felt in the first quarter of the financial year of 2021. 

However, “as a best-case scenario”, Viswanathan Rajendra who is global management consultant, said, a lot of businesses are hoping for a V-shaped recovery, in this situation the economy faces the sharp decline followed by an equally sharp recovery. But, if restrictions are remained for long, the slowdown can be prolonged for many economies. 


India has history of taking revolutionary steps during the period of crisis. For an instance, the 1991-92 crisis made India take the most daring reform of opening the economy via liberalization, privatization, and globalization as result the private sector became free from heavy import tariffs and opened economy attracted many foreign investments to keep balance of payment balanced.

Since, the V- shaped recovery curve unfolds the chances of the speedy recovery but it will only be possible if following are taken in considerations:

  • The government can take bold and unconventional reforms to bring the economy back on its feet. But crisis of 2020 is not at par with any recent crisis, it is said by the global economists that it will surpass the impact of The Great Depression 1929. 
  • As mere making policies alone would not help making the economy developed and sustained, for that demands the proper allocation of resources, channelization of funds in all stagnant sectors for free flow, formulation and implementation of plans and strategies along with effective control and surveillance. 
  • It would demand the whole new sets of visions and objectives for the nation which can heal the wounds of people who have lost their livelihood and give them reasons to hold their dream.

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