Theoretical Study On Non-Performing Assets In Banks: A Threat To Financial Stability

Abstract

The Indian banking sector is a critical pillar of the country’s financial architecture, playing a vital role in driving economic growth, enabling credit expansion, and fostering financial inclusion. However, one of the most significant challenges facing this sector today is the issue of Non-Performing Assets (NPAs). NPAs are loans or advances for which the principal or interest payment remains overdue for more than 90 days, reflecting poor asset quality and inefficiency in loan recovery mechanisms. The menace of NPAs has implications that extend beyond individual banks, posing a systemic risk to financial stability and the broader economy.

This paper delves into the underlying causes of rising NPAs, including economic slowdowns, inadequate credit risk assessment, policy paralysis, and fraudulent practices. It highlights the cascading effects of NPAs, such as reduced profitability, a credit crunch, and erosion of investor confidence, which collectively undermine the resilience of the banking system. Moreover, this study examines the measures undertaken by the Indian government and regulatory authorities, such as the Insolvency and Bankruptcy Code (IBC) and Asset Reconstruction Companies (ARCs), to tackle NPAs effectively.

By exploring global best practices and drawing comparisons with international models, the paper proposes innovative strategies to strengthen the Indian banking system’s capacity to manage NPAs. Leveraging technology, improving governance, and fostering collaboration among stakeholders are emphasized as essential steps. The resolution of NPAs is not just a financial imperative but a prerequisite for ensuring sustained economic growth and maintaining trust in India’s banking system.