Published on Nov 30, 2023
The banking industry has undergone a sea change after the first phase of economic liberalization in 1991 and hence credit management. While the primary function of banks is to lend funds as loans to various sectors such as agriculture, industry, personal loans, housing loans etc., in recent times the banks have become very cautious in extending loans.
The reason being mounting non-performing assets (NPAs). An NPA is defined as a loan asset, which has ceased to generate any income for a bank whether in the form of interest or principal repayment. As per the prudential norms suggested by the Reserve Bank of India (RBI), a bank cannot book interest on an NPA on accrual basis. In other words, such interests can be booked only when it has been actually received.
Therefore, an NPA account not only reduces profitability of banks by provisioning in the profit and loss account, but their carrying cost is also increased which results in excess & avoidable management attention. Apart from this, a high level of NPA also puts strain on a banks net worth because banks are under pressure to maintain a desired level of Capital Adequacy and in the absence of comfortable profit level, banks eventually look towards their internal financial strength to fulfill the norms thereby slowly eroding the net worth.
When a borrower, who is under a liability to pay to secured creditors, makes any default in repayment of secured debt or any installment thereof, the account of borrower is classified as nonperforming assets (NPA) .NPAs cannot be used for any productive purposes because they reflect the application of scarce capital and credit funds. Continued growth in NPA threatens the repayment capacity of the banks and erodes the confidence reposed by them in the banks. In fact high level of NPAs has an adverse impact on the financial strength of the banks who in the present era of globalization, are required to conform to stringent International Standards. “Non Performing Asset” means an asset or account of a borrower, which has been classified by bank or financial institution as substandard, doubtful or loan asset.
To study of the concept of Non Performing Asset in Indian perspective.
To study NPA standard of RBI
To study the Reasons for & Impact of NPAs
To evaluate the efficiency in managing Non Performing Asset of different types of banks (Public, Private & Foreign banks) using NPA ratios & comparing NPA with profits.
To check the proportion of NPA of different types of banks in different categories.
The research design that will be use is Descriptive Research.
Involves gathering data that describe events and then organizes, tabulates, depicts, and describes the data.
Uses description as a tool to organize data into patterns that emerge during analysis.
Often uses visual aids such as graphs and charts to aid the reader.
Using of hypothesis testing.
To understand the concept of NPA in Indian Banking industry.
To understand the causes & effects of NPA
To analyze the past trends of NPA of Public, Private & Foreign banks in different sector.
The Indian banking system is financially stable and resilient to the shocks that may arise due to higher non-performing assets (NPAs) and the global economic crisis, according to a stress test done by the Reserve Bank of India (RBI). Significantly, the RBI has the tenth largest gold reserves in the world after spending US$ 6.7 billion towards the purchase of 200 metric tons of gold from the International Monetary Fund (IMF) in November 2009. The purchase has increased the country's share of gold holdings in its foreign exchange reserves from approximately 4 per cent to about 6 per cent. Following the financial crisis, new deposits have gravitated towards public sector banks.
According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: September 2009', nationalized banks, as a group, accounted for 50.5 per cent of the aggregate deposits, while State Bank of India (SBI) and its associates accounted for 23.8 per cent. The share of other scheduled commercial banks, foreign banks and regional rural banks in aggregate deposits were 17.8 per cent, 5.6 per cent and 3.0 per cent, respectively. With respect to gross bank credit also, nationalized banks hold the highest share of 50.5 per cent in the total bank credit, with SBI and its associates at 23.7 per cent and other scheduled commercial banks at 17.8 per cent. Foreign banks and regional rural banks had a share of 5.5 per cent and 2.5 per cent respectively in the total bank credit.
The report also found that scheduled commercial banks served 34,709 banked centres. Of these centres, 28,095 were single office centres and 64 centres had 100 or more bank offices. The confidence of non-resident Indians (NRIs) in the Indian economy is reviving again. NRI fund inflows increased since April 2009 and touched US$ 45.5 billion on July 2009, as per the RBI's February bulletin. Most of this has come through Foreign Currency Non-resident (FCNR) accounts and Non-resident External Rupee Accounts. India's foreign exchange reserves rose to US$ 284.26 billion as on January 8, 2010, according to the RBI's February bulletin.
Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI. An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvement in the payment and settlement systems, recovery climate, up gradation of technology in the banking system, etc., it was decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as from that date, a Non performing asset (NPA) shell be an advance where
i. Interest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan,
ii. The account remains 'out of order' for a period of more than 180 days, in respect of an overdraft/ cash Credit(OD/CC),
iii. The bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted,
iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and
v. Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shell be a loan or an advance where;
i. Interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan,
ii. The account remains 'out of order' for a period of more than 90 days, in respect of an overdraft/ cash Credit(OD/CC),
iii. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and
v. Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.
Impact of NPA
NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA doesn‟t affect current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low ROI (return on investment), which adversely affect current earning of bank.
Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for shortest period of time which lead to additional cost to the company. Difficulty in operating the functions of bank is another cause of NPA due to lack of money. Routine payments and dues.
Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now day‟s banks have special employees to deal and handle NPAs, which is additional cost to the bank.
Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. It will lose its goodwill and brand image and credit which have negative impact to the people who are putting their money in the banks.
1) https://rbi.org.in/scripts/AnnualPublications.aspx?head=Trend and Progress of Banking in India
2) Tables in Annexure: Retrieved on 25th February, 2010 from
https://rbi.org.in/scripts/AnnualPublications.aspx?head=Statistical Tables Relating to Banks of India
3) Master Circular: Retrieved on 3rd March, 2010 from https://rbi.org.in/scripts/NotificationUser.aspx
4) Introduction to Banking Industry: Retrieved on 25th January, 2010 from https://en.wikipedia.org/wiki/Banking_in_India
5) Banking in India-2009-10:Retrieved on 30th January, 2010 from https://www.ibef.org/industry/Banking.asp
6) Recent History Of Indian Banking: Retrieved on 7th February, 2010 from
https://www.bankingindiaupdate.com/general.html
