Read the following passage and answer the questions carefully.
Paragraph 1: The economic progress of a nation and the development of its banking sector is invariably interrelated. The banking sector is an indispensable financial service sector supporting development plans through channelising funds for the productive purpose, the intermediating flow of funds from surplus to deficit units and supporting financial and economic policies of the government. Banks serve social objectives through priority sector lending, mass branch networks and employment generation. Maintaining asset quality and profitability are critical for banks survival and growth. In the process of achieving such objectives, a major roadblock to the banking sector is the prevalence of Non-Performing Assets (NPA). In India, the problem of bad debts was not taken seriously until it was mandated by the Narasimham and Verma committee. The committee mandated the curbing of the particular issue because NPA directs towards credit risk that bank faces and its efficiency in allocating resources.
Paragraph 2: The aim of this research paper is to study the current trend of NPAs in Indian scheduled banks (up to 2013-14 only). The paper further examines the critical reasons behind the rise of this issue, its impact on the Indian banking sector and the Indian economy. In order to understand the criticality of the problem, an effort has been made to study what impact NPAs have on ease of doing business rankings. On a global scenario, there can be numerous reasons for rising NPAs such as global slowdown, economic crisis, fall in domestic demand etc. However, pertaining to the Indian banking sector, there are certainly other issues that cater to the rise of NPAs. These issues are- Wilful defaulters, fraud, mismanagement and misappropriation of funds, Lack of proper pre-appraisal and follow up, Under financing, Delay in completing the project., Business failures, Deficiencies on the part of bank viz., in credit appraisal, monitoring and follow-ups.
Paragraph 3: The concept of priority sector officially came into the picture in 1972, after the National Credit Council emphasized that there should be a larger involvement of the commercial banks in the priority sector. In 1974, the banks were given a target of 33.33% as a share of the priority sector in the total bank credit. Later this rate was revised to 40%. RBI has divided the priority sector into categories like agriculture, small-scale industries, small businesses, state-sponsored organisations for SC/ST, education loan, housing loan, consumption loan, microcredit, loans to software industry, food and agro-processing sector, venture capital and export credit. Presently, Lok Adalats, DRT and SARFAESI are the common methods sought for credit recovery. The SARFAESI Act even though being the best mode of recovery, still provides the recovery of only 25% of the total loan amount. The number of cases referred to in all the channels and the amount recovered increased successively every year but the percentage of the amount recovered to the total amount still remains very low. Thus, it shows that though recovery channels were contributing in recovering the NPA’s but that was still not enough.
Paragraph 4: In today’s era of globalization, the role of the banking sector is not limited to providing financial resources to the needy sectors but the banks act as agents of financial intermediation and also plays a major role in the fulfilment of social agendas of the Government. However, a steady rise in the NPA’s of banks affects not only the banking sector but the country’s economy as a whole. Firstly, NPAs leads to asset contraction for banks. Due to the presence of NPAs, the banks follow low-interest policy on deposits and high-interest policy on advances provided. Thus, this act puts a pressure on the recycling of funds and further creates a problem in getting new buyers. Secondly, as per the Basel norms, all banks are required to maintain capital on risk-weighted assets. A rise in NPAs pressurizes the banks to increase their capital base further. Lastly, the rise in NPAs reduces the customer’s confidence on the banks. The rise in the NPAs affects the profitability of the bank which further hinders the returns to be received by the customers. The decrease in profits leads to a lower dividend pay-out by the banks and affects the ROI expectations of the customers. Thus, a rise in NPAs not only affects the performance of the banks but also affects the economy as a whole.
Paragraph 5: NPAs have not been a problem only for the banks but has been a problem for the economy too. The money locked up in NPAs has a direct impact on the profitability of the banks as many Indian banks are highly dependent on interest income. Though many steps have been taken by RBI and the government to reduce NPAs they are not enough to curb it. The government needs to speed up the recovery process of loans and also need to reduce the mandatory lending to priority sector as it is one of the major contributors to the bank’s NPAs. Also, right fiscal and monetary policies along with RBI’s strict supervision is needed to eradicate this disease from its root.
The correct answer is 3.
As per the passage, presently, Lok Adalats, DRT and SARFAESI are the common methods sought for credit recovery. The SARFAESI Act even though being the best mode of recovery, still provides the recovery of only 25% of the total loan amount. $
3. What is the substitute of - Calmness and indifference to suffering