NPAs linked to trade credit crisis

  • June 2, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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NPAs linked to trade credit crisis

Subject: Economy

Section: Monetary policy

Present scenario of Non-performing assets (NPAs) in India:

  • NPA has reduced to around 5% by end of FY22
  • This low level has been possible because of:
    • Write-offs: From 2017-22 scheduled banks have written off Rs. 10 lakh crore.
    • Multiple recovery measures by RBI: from 2014-22 Rs 8.6 lakh crore have been recovered.
    • A general improvement in corporate financials
  • There is presently a potential NPA/fraud risk, as indicated by RBI Governor’s message to PSB to check the true health of the Banks and not resort to “window dressing”.
  • Delay in detection of Fraud:
    • The average time lag between occurrence of fraud and its detection is 23 months whereas it is 57 months for large frauds
    • the reason for this is our bank-centric approach, while disruptions in trade credit (TC)-related payables and receivables to bank working capital are not on the radar.
Non-performing asset (NPA)

Reserve Bank of India defines Non Performing Assets in India as any advance or loan that is overdue for more than 90 days. “An asset becomes non-performing when it ceases to generate income for the bank,”

RBI Tools to handle NPAs

  1. Recovery of Debts and Bankruptcy Act, 1993,
  2. Securitisation and Reconstruction of Financial Assets and
  3. Enforcement of Security Interest Act, 2002 and
  4. Insolvency & Bankruptcy Code, 2016 (IBC)

Fraud Detection

  1. Central Fraud Registry,
  2. Centralised Information Management System (CIMS)

Importance of Trade Credit (TC):

  • TC is far bigger than working capital from Banks. MSMEs predominantly depend on TC for their working capital.
  • TC related disruptions create liquidity challenges for firms.resort to delays in submitting data to banks, manipulation of accounts and financial frauds to avail bank credit facility till it is detected by the bank. Early warnings are delayed and they are inadequate and less reliable. Hence the delays in detection of stress.
  • TC acts as a source of short term capital for the firm, and it mostly operates through trust and perceived credit-worthiness of the network. After Covid-19 pandemic and demonetisation, the trust level especially in MSME TC network has seen a decline.
Trade Credit

Trade credit is a type of commercial financing in which a customer is allowed to purchase goods or services and pay the supplier at a later scheduled date.

TC and NPA:

  • Central Vigilance Commission (CVC) analysis of top 100 frauds as of 2017 showed most frauds related to TC/working capital operations.
  • Frauds involve inflated/manipulated/fabricated receivables, payables and stocks and difficulties and delays in verification of these, diversion of funds and related parties transactions.

Solution:

  • Mapping of the disruptive impacts of TC on market liquidity, payment system, financial stress and interconnected financial networks like banks needs to be done.
  • An integrated approach involving banks, NBFCs and TC networks is needed to take a holistic view of NPAs and not just focus on Banks.
  • GSTN as a Financial Information Provider under the Account Aggregator framework can provide a common platform to compile structured data on sales and purchases. This is because while TC/working capital operations are complex, the payment settlement data can help judge financial health of a firm.
economy NPAs linked to trade credit crisis