The non-performing assets (NPA) crisis has shaken up the core of the country’s economy, with thousands of crores of toxic debt on Indian balance sheets and billions of dollars being pumped in by the government to help provide the infected banks with some form of relief.
In fact, a report published by Care Ratings showed that India ranks fifth out of 39 major world economies plagued by bad loans, and the NPA accumulated by Indian banks are higher than those in the United States, United Kingdom, China and Japan. The crisis has crippled the banking system of the country, with double-digit falls witnessed in equity markets and government-imposed controls through several forms of legislation.
Yet, in a crisis that has otherwise been defined through a wide variety of acronyms with the NPA, PCA, ARC, NBFC and RBI to name a few, the implications of the crisis are far from just academic jargon and a couple of front-page articles. Contrary to common belief, the crisis doesn’t only affect the top 1%, but instead has real-life implications on your neighbours, family, friends, and if youre a student hoping to study abroad in the next few years, you too.
Understanding the crisis
According to the Reserve Bank of India (RBI), an NPA is a credit facility for which the debtor has failed to pay the pending instalment of principal for more than 2 quarters (or 180 days), essentially, it is a loan which the borrower has failed to repay.
As loans are a type of credit facility – and the biggest contributor to the NPA crisis – its important for these loan-providing institutions to understand how different types of loans are faring. Looking at educational loans, we see that educational NPAs had increased by 191% between March 2013 and 2016. Ever since, there has been a landslide in the supply of educational loans whereby the growth of educational loans in 2015 was 17%, in immense contrast to the 2% growth recorded in 2017.
Evidently, banks have gotten on their back foot when it comes to expanding their exposure to such loans, which increases the competition students face. This decrease in the supply of such loans is a huge hurdle for many students who depend on them to pay the exorbitant costs of an education abroad.
Cause of the crisis
In India, the NPA crisis has been majorly fuelled due to corporate mismanagement. Failures of large corporations have caused a boom in NPAs, yet, one of the biggest issues that arise is the spikes in retail lending costs.
In a climate of higher lending risks, financial institutions expect to be compensated by higher earnings, usually reflected in the lending rates that debtors pay. In a first for the Modi administration, the RBI has initiated a rise in interest rates. While the hike has several consequences, one of the most considerable is the rise in inward investment as more investors jump to earn higher interest rates.
At a time where the NPA crisis is causing leakages worth the thousands of crores for the Indian government, it should come as no surprise that the government is resorting to hiked rates to help attract investment to help erase such toxic assets on Indian balance sheets.
The combination of the above makes educational loans much more expensive, thus making affordability an even worse predicament for those who rely on such external sources of funding to be educated abroad. In the long run, the compounding nature of such interest can present a daunting proposition to such borrowers.
Additionally, even if we were to assume that students could afford such hiked up interest rates and survive the finer filter of financial institutions which provide such credit facilities, the NPA crisis has also caused ripples in the job market. The diminished lending capacities of financial institutions and the presence of NPAs on balance sheets have a contractionary impact on the economy. This has a profound impact on the growth of firms, and on the establishment of new firms, causing direct repercussions in the job markets, as firms have fewer resources to spend money on employees, making employment far more competitive and difficult especially for someone with no work experience coming right out of an undergraduate program. The NPA crisis has every step of the way, from the supply and demand sides of educational loans to post-education opportunities, caused massive ripples and made life tough for students.
Rishit Jain is an analyst at Qrius