Impact of NPAs on Indian Economy

The Indian Economy is experiencing a lot of slowdown as GDP numbers are falling.

We are not in a state of bullishness as some heavyweight sectors like Automobile,

FMCG are in negative w.r.t. their YoY growth.

But today I am going to discuss on rising NPAs and their impact on Indian
economy.

The economic growth is measured by GDP (Gross Domestic Product). India’s GDP
stands at 5.1% (Q2) and in the previous quarter it was 5.8% (Q1). GDP indicates
the manufacturing of goods and services in a year or quarter.

When GDP is falling, it reflects that the manufacturing/service sector has slowed
down in its rate of production.

They are unabl to produce good enough because of lack of funds.

Now this lack of funds is due to NBFC Crisis of IL&FS, Essel, etc.

These NBFCs are the heart of any economy as they pump in liquidity. But since
they have defaulted in their payments, the sectors are unable to receive enough
funds for production.

Hereon, we will relate this case with the banks.

Second position in maintaining liquidity is Banks. The companies have taken credit
from banks but when NBFCs default, then the companies also runs into default as
many don’t get payments.

Banks also have investments (bonds) in these companies as well as NBFCs.

So now here we can say that Banks also increase their bad debts i.e. their NPAs.

NPA stands for Non-Performing Asset. It is an asset that does not perform and is
no longer able to give returns.

Now the actual impact on economy starts…

With rising NPAs in banks, RBI the Central Bank of our India imposes certain
restrictions on banks that have high NPAs as people’s money lies with banks. So
RBI needs to regulate banks with high NPAs.

These restrictions are PCA i.e. Prompt Corrective Action. It is an action undertaken
by RBI so that the High NPA Bank will only be able to lend upto very small limit.

And Companies require huge capital so their demand of funds is very high. With
PCA in place, the banks cannot lend the companies thereby reducing the
producing power and decreasing GDP.

The Government of India has taken several steps to eliminate this slowdown.

1. Reduction in Corporate Tax

2. Recapitaisation of Banks
3. Merging of PSUs
4. Reducing Repo Rate

This is showing some positive signs of rising of economy as automobile sector

is now experiencing some positivity in this second quarter.