Which of the following sectors contribute in recent years to the deterioration of asset quality of commercial banks by way of Non-Performing Assets ? 1. Agriculture and allied sector 2. Industrial sector 3. Infrastructure sector 4. Information technology sector Select the correct answer using the code given below :

Correct — B, 2 and 3 only. The bad-loan problem that Indian banks carried through the 2010s came out of industry and infrastructure. Lending to large corporate borrowers in steel, power, telecom, roads, textiles and mining was made in the boom years on demand projections that did not materialise, and when projects were delayed by land, fuel-linkage and clearance problems the borrowers could not service the debt. The Reserve Bank's asset quality review in 2015 forced banks to recognise those exposures honestly, and the stressed accounts that surfaced were overwhelmingly of that kind. Agriculture generates non-performing assets too, but its share of the total is small and its loans are small; information technology is a services industry that funds itself largely from its own cash and is not a stressed sector at all.

• (a)1 and 2 only — Keeps industry but replaces infrastructure with agriculture. Infrastructure is the sector where the largest single exposures went bad, particularly power projects without assured fuel or an offtake agreement.
• (c)1 and 4 only — Names the two sectors that were least responsible. Agriculture's contribution is real but small in value terms, and information technology is not a stressed lending sector.
• (d)1, 2, 3 and 4 — Sweeps in all four. Information technology in particular does not belong — the sector's large firms are cash-rich and among the least leveraged borrowers in the economy.

A loan becomes a non-performing asset when interest or principal has been overdue for more than ninety days. Once classified, the bank must set aside provisions against it out of profit, so a rising stock of such assets eats capital, reduces the bank's ability to lend, and slows credit growth across the economy. The problem is therefore not confined to the banks that made the loans.

The Indian episode is usually told in three stages. Large corporate lending expanded quickly in the years after 2005, much of it to infrastructure projects. Projects stalled, and banks used restructuring schemes to avoid recognising the losses. The asset quality review of 2015 ended that, and the reported gross non-performing asset ratio of the banking system rose steeply as concealment became impossible. The response combined the Insolvency and Bankruptcy Code of 2016, which created a time-bound resolution route, recapitalisation of the public sector banks, and a series of mergers. Since the exam the position has turned around, with the gross ratio falling to multi-decade lows and provisioning cover much improved. A National Asset Reconstruction Company, the vehicle usually called a bad bank, was set up in 2021 to take legacy stressed accounts off bank books.

• A loan is a non-performing asset when interest or principal is overdue for more than ninety days.
• Industry and infrastructure, especially power, telecom, roads, steel and textiles, accounted for the bulk of the stressed assets of Indian banks.
• The Reserve Bank's asset quality review in 2015 forced recognition of loans that had been concealed by restructuring.
• The Insolvency and Bankruptcy Code of 2016 created a time-bound resolution process for defaulting borrowers.
• The gross non-performing asset ratio of scheduled commercial banks has fallen to multi-decade lows since the peak reached in 2018.

• Confusing the number of defaulting accounts with the value at risk; agriculture has many of the first and little of the second.
• Assuming every large sector of the economy must be a large source of bad loans.
• Reading the ninety-day rule as ninety days from sanction rather than from the missed payment.

Sector-attribution items in banking are decided by exposure, so ask which sectors borrow in very large single amounts and which do not.

• practice — not a real PYQ

  A loan account in an Indian bank is classified as a non-performing asset when interest or principal remains overdue for more than

  • (a)30 days
  • (b)60 days
  • (c)90 days
  • (d)180 days

  Answer(c) 90 days — the standard applied to term loans and cash-credit accounts alike.

• practice — not a real PYQ

  The Insolvency and Bankruptcy Code in India was enacted in which year?

  • (a)2013
  • (b)2015
  • (c)2016
  • (d)2019

  Answer(c) 2016 — it replaced a scattered set of older laws with a single time-bound resolution process.