A STUDY OF NON-PERFORMING ASSETS OF NBFCs AND A COMPARISON WITH PUBLIC SECTOR BANKS

Abstract

A study is conducted to analyse major causes of occurrence of NPAs in NBFCs and find out ways adopted to effectively manage rising levels of NPAs. Exploratory research is being carried out wherein data is collected from secondary sources such as Annual Reports, statutory fillings and RBI publications. The main objective of this study is to understand why NPAs are drawing so much attention in corporate sector. For the study, three major NBFCs are taken into consideration- Indian Renewable Energy and Development Agency Limited (IREDA), REC Limited and Power Finance Corporation (PFC). All these three NBFCs are Central Public Sector Undertakings, fall into same category of NBFCs i.e. NBFC-ND-SI, non-deposit taking and systematically important as per RBI Master Circular. For data analysis, financial statements of last 5 financial years have been reviewed to find out NPA level in each CPSE. Annual report and corporate governance practices of these companies have been reviewed to identify measures adopted to reduce rising NPAs. Articles and research papers have also been reviewed to find out underlying causes and ways that can help these NBFCs to manage their advances. It is found that probable causes of NPAs in NBFCs include borrower creditworthiness, economic downturns, and sector-specific risks. To manage NPAs effectively, NBFCs should focus on strengthening collection processes, conducting regular asset quality reviews, and implementing prudent underwriting practices. Diversification of loan portfolios and restructuring options for struggling borrowers can also mitigate NPA risks. Overall, proactive measures are essential to navigate the challenges posed by NPAs and sustain financial health. Banks typically implement stringent follow-up procedures for non-performing assets, including regular monitoring, restructuring, and recovery through legal channels. NBFCs often focus on personalized approaches, such as flexible repayment options and closer client relationships, but may have fewer resources for legal recourse, relying more on negotiation and proactive risk management. All three banks have made efforts to reduce their Net NPA balances over the chosen period. NPA ratios of banks are higher, indicating relatively higher credit risk compared to CPSE NBFCs like IREDA, REC, and PFC, which maintain consistently lower NPA ratios. This suggests potentially stronger risk management practices within CPSE NBFCs.