IDN TAKE: ECONOMY: Non-Performing Assets (NPA)

The term Non Performing Asset or NPA as it is commonly known has gained currency in the last few years with the stock value of a bank these days largely depending upon the proportion of NPA it is currently reporting to its total assets. When the pledged security of a loan falls below par due to any reason this security and the loan become sub prime .The difference between payment due and the value of the sub prime security becomes the Non Performing Asset of the bank.

Case of a defaulter purposely failing to repay a heavy loan taken from a bank is rare these days because loaning norms are quite stringent.Moreover bank is not expected to bother as long as it can invoke the security pledged against that loan which normally comprise gold, real estate , equity etc, value of which is determined by the market forces. Due to vicissitudes of market condition a secured loan can become suddenly sub-prime when value of the pledged security falls. Since crests and troughs in a business cycle may stay on for several years it becomes impossible for the bank to continue with the sub prime security till the value recovers. Hence the bank has to come clean by declaring this loan as NPA (Non Performing Asset) and selling this at a discount to a purchaser of loan. This of course tells upon the profitability of the bank and so, high NPA is a great dead weight for any bank to survive and grow.

In case of a long economic slowdown which is observed much less in India than in the West , bank operation is stalled if loans are not availed by entrepreneurs. It is mostly through loan interest that bank makes money as in the West ( i.e. developed economies) interest rates being ultra low there is practically no savings or term deposit from account holders. In fact one of the many reasons why our RBI hesitates to reduce bank rates is that it may significantly affect the incoming cash to banks.

Keeping financial reputation in tact therefore is of great importance for the banks to survive. There comes the need for manipulations to keep books of accounts attractive whereby actual NPA is quite bigger than projected in the certified balance sheets. 

This end game is played effectively by the accountancy firms.In fact there are only 4 elite accountancy firms in the world who are involved in significant number of the book checking businesses worth their name. They are KPMG, Ernst & Young, Deloitte and Price Water House. Rating agencies also follow them blindly. It is often by their good grace that a bank or for that matter any company retains its good health although it may be actually sick. Lehman Bros capitulated long after its clinical death had occurred. There are about 23 trillion dollars worth of money floating in the business world which are games in the hands of these firms. Banks and financial houses are emerging in and out of this money as per their expertise.