1

Managerial Economics Projects

Non-Performing Assets of Indian Banks and
Their Impact on Indian Economy
Submitted to: Submitted by:
Dr. P. A. Ratna PRAVEEN TITARE (031)
RAHUL SARKAR (032)
RAHUL ROY (033)
RATUL BISWAS (034)
RISHI KHARE (035)



2

ACKNOWLEDGEMENT

We would like to extend our gratitude to the people who helped us to understand and make this
economics report. I would like to thank Dr. P.A Ratna for providing us the opportunity of getting
into something new and so important in the context of Indian Economy. We are deeply grateful
for her professionalism, valuable guidance throughout our entire period of report making that we
do not have enough words to express our deep and sincere appreciation.
Thanking you.



3

TABLE OF CONTENT

Sr.
No.
Title Page No.
1

Abstract


2 Introduction
3 Literature Review



4 Methodology
5 Analysis & Findings




6 Conclusion
7 Bibliography


4

NON-PERFORMING ASSETS OF INDIAN BANKS AND THEIR
IMPACT ON INDIAN ECONOMY

Abstract
Across the globe, the banking sectors acts as the catalyst for the countrys economy and plays an
important role in the economic development of a country. Financial sector reform in India has progressed
rapidly on aspects like interest rate deregulation, reduction in reserve requirements, barriers to entry,
prudential norms and risk-based supervision. But progress on the structural-institutional aspects has been
much slower and is a cause for concern. Banks are growth-driver and the banking business are exposed to
various risks, such as credit risk, liquidity risk, interest risk, market risk, operational risk and management
risk. Apart from these risks the very important risk is loan recovery. Non-performing Asset (NPA) which
is an important parameter in the analysis of financial performance of a bank is mounting year by year
particularly in nationalized banks. The Gross Non-Performing Assets (GNPAs) of public-sector banks
(PSBs) have shown a rising trend, increasing by almost four times since March 2010 (Rs 59,972 Crore) to
March 2014 (Rs 2,04,249 Crore) (provisional). As a percentage of credit advanced, NPAs were at 4.4 per
cent in March 2014 (provisional) compared to 2.09 per cent in 2008-09. A high level of NPAs suggests a
large number of credit defaults that affect the profitability and net-worth of banks. For better economic
future of the Nation, potential changes are a must to tackle the NPA problem with effective judiciary,
polity and the bureaucracy. Thus it became important to make entire banking and financial sector vibrant
and competitive. The paper provides strategic overview of the problem and deals with understanding the
concept of NPAs; it also highlights its magnitude, real causes behind growing and managing NPAs in
Indian PSBs. At last it suggests ways to handle the problem based on the experiences from the past with
concluding remarks.
Keywords: NPA, GNPAs, PSBs etc.

5


Introduction
Banking in India originated in the last decade of the 18th century. The Indian Banking Industry is playing
a vital role in the socio-economic augmentation of the country. Private and public sector banks occupy a
major part of banking in India. They are the oldest form of banking institutions, having a large volume of
operations over a vast area. They also have a very good network of branches even in rural and semi-urban
areas. Now, they are not only engaged in their traditional business of the accepting and lending money but
have diversified their activities into new fields of operations like merchant banking, leasing, housing
finance, mutual funds and venture capital. They have introduced a number of innovative schemes for
mobilizing deposits. It is continually noticed that these banking sector are facing so many drastic changes
according to the technology development right from the Financial Sector Reforms initiated in the year
1991. The basic functions of banks are accepting all kinds of deposits and supply money-The life blood
of business concerns by lending process which is defined in section 5 (b) of the Banking Regulation
Act, 1949. Banks are the main stimuli of the economic progress of a country. The primary function of
banks is to lend funds as loans to various sectors such as agriculture, industry, personal and housing etc.
and to receive deposits. Receiving deposit involves no risk, since it is the banker who owes a duty to
repay the deposit, whenever it is demanded.
Non-performing assets (NPAs) reflect the performance of banks. It is one of the major concerns for banks
in India. On the other hand lending always involves much risk because there is no certainty of repayment.
In recent times the banks have become very cautious in extending loans, the reason being mounting non-
performing assets. A high level of NPAs suggests high probability of a large number of credit defaults
that affect the profitability and net-worth of banks and also erodes the value of the asset. The NPA growth
involves the necessity of provisions, which reduces the overall profits and shareholders value.
The accumulation of huge NPAs in banks has assumed great importance. The depth of the problem of
bad debts was first realized only in early 1990s. RBI issued guidelines in 1993 based on recommendations
of the Narasimham Committee that mandated identification and reduction of NPAs be treated as a

6

national priority because the level of NPA act as an indicator showing the bankers credit risks and
efficiency of allocation of resource. The magnitude of NPAs in banks and financial institutions is over Rs.
2,04,000 Crores. While gross NPA reflects the quality of the loans made by banks, net NPA shows the
actual burden of banks. Now it is increasingly evident that the major defaulters are the big borrowers
coming from non-priority sector. The banks and financial institutions have to take the initiative to reduce
NPAs in a time bound strategic approach.

Objectives of the Study
This study focuses on the following major objectives:
To understand the concept of Non-performing assets (NPAs).
To identify the Non-performing assets at public sector banks
Impact of NPAs on the liquidity of banks and thereby affecting Indian Economy.
To make appropriate suggestions to reduce the NPAs.

Non-Performing Assets (NPAs):
Non-performing assets (NPAs) are those assets that cease to generate income for banks. The
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI)
Act, 2002 defines NPAs as an asset or account of a borrower, which has been classified by a bank or
financial institution as sub-standard, doubtful, or loss assets in accordance with the direction and
guidelines relating to asset classification issued by the RBI. From 31
st
March 2004 an asset is considered
to have gone bad when the borrower has defaulted on principal and interest repayment for more than one
quarter or 90 days. The following are the RBI guidelines for NPA classification and provisioning:
1. Standard Assets: Standard Assets, which are not NPAs, but involve business risks, require a
minimum of 0.25% provision on global portfolio but not on domestic portfolio.

7

2. Sub- Standard Assets: These are those accounts which have been classified as NPAs for a period
less than or equal to 18 months. The general provision of 10% of total outstanding principal plus
entire outstanding interest should be made on sub-standard assets.
3. Doubtful Assets: These are those accounts which have remained as NPAs for a period exceeding
18 months. On these assets the banks are required to provide 100% for the unsecured portion and
additional provision of 20% to 50% advances, if doubtful for 3 and above 3 years.
4. Loss Assets: Loss assets are those NPA accounts which are identified as unreliable by internal
inspector of bank or auditors or by RBI on inspection 100% provision for the amount outstanding
must be made.
Standard assets are treated as performing assets and the remaining categories of sub-standard,
doubtful and loss assets are known as NPAs. According to RBI directives, all banks are required to
maintain NPAs both on gross and net basis.
Types of NPAs
Gross NPA: Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI
Guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It
consists of all the nonstandard assets like as sub-standard, doubtful, and loss assets. It can be calculated
with the help of following ratio:
Gross NPAs Ratio = Gross NPAs / Gross Advances
Net NPA: Net NPAs are those type of NPAs in which the bank has deducted the provision regarding
NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge
amount of NPAs and the process of recovery and write off of loans is very time consuming, the banks
have to make certain provisions against the NPAs according to the central bank guidelines.
It can be calculated by following:
Net NPAs = Gross NPAs Provisions / Gross Advances Provisions

8

NPA Lifecycle in Banks


9

Literature Review
Khedekar Pooja S, (2012) A strong banking sector is essential for a growing economy. Indian
banking sector emerged stronger during 2010-11 in the after math of global financial year 2008-
10 under the watchful eye of its regulator. This involves NPAs act as a financial indicator
showing the credit risks & efficiency of allocation of resources. NPA the necessity of provisions,
any increase in which brings down the overall profitability of banks. This not only affects the
banks but also the economy on whole.
Meeker G Larry and Gray Laura (1987) In 1983 the public was given its first opportunity to
review bank asset quality in the form of non-performing asset information. A regression analysis
comparing the non-performing asset statistics with classifications of assets suggests that the non-
performing assets information can be a useful aid in analyzing the asset quality of banks,
particularly when the information is timely.
Since, the financial industry in a developing country like India is undergoing through a very
dynamic pace of restructuring, it is imperative for a bank to constantly monitor their efficiency on
Non-Performing Assets, Capital Risk-Weighted Asset Ratio, Business Per Employee, Return on Assets
and Profit per employee. Here, Non-Performing Assets is a negative financial indicator. One of the
major reasons for NPAs in the banking sector is the 'Direct Lending System' by the RBI under
social banking motto of the government, under which scheduled commercial banks are required to
lend 40% of their total credit to priority sector. The banks who have advanced to the priority
sector and reached the target suffocated on account of raising NPAs, since long. The priority sector
NPAs have registered higher growth both in percentage and in absolute terms year after year.
Selvarajan B and Vadivalagan G (2012) Over the few years Indian banking has tried to integrate
with the global banking, but the attempts has been facing lots of hurdles in its way due to certain
inherent weakness, despite its high sounding claims and lofty achievements. In a developing country,
banking is seen as an important instrument of development, while the demanding NPAs of banks have
become a burden on the economy.

10

Non-Performing Assets are not merely non profitable but they add cost to the credit management. The
fear of Non-Performing Assets fills the psychology of bank managers in entertaining new projects for
credit expansion. Non-Performing Assets is not a dilemma faced exclusively by the bankers; it is in fact
an all pervasive national whip swaying the entire Indian economy. Non-Performing Assets have affected
the profitability, liquidity and competitive functioning of banks and developmental of financial
institutions and finally the psychology of the bankers in respect of their movement towards credit delivery
and credit expansion. NPAs do not generate any income for the banks, but at the same time banks are
required to make provisions for such NPAs from their current profits. Apart from internal and external
complexities, increases in NPAs directly affects banks' profitability sometimes even their existence.
Murthy, KV Bhanu Gupta, Lovleen (2012) study shows the relationship between competition and
concentration of growth in NPAs. Our results show that on an average across the banking industry
segments, average non-performing assets in the past 11 years have been declining at the rate of 13% p.a.
compounded growth rate. The old private sector banks' non-performing assets have reduced at the rate of
11.98% and that of public sector banks have declined at the rate of 18% and foreign banks at 11.4%.
Though new private sector banks and the foreign banks seem to be more efficient but their conduct does
not show consistency and stability. By constant monitoring, it is possible to detect, the doubtful accounts,
the developing sickness of the early stages itself and an attempt could be made to review the unit and put
it back on the road to recovery.
Non-Performing Assets give rise to negative impact on banking stability and growth. Issue of NPA and its
impact on erosion of profit and quality of asset was not seriously considered in Indian banking prior to
1991. There are many reasons cited for the alarming level of NPA in Indian banking sector. Asset quality
was not prime concern in Indian banking sector till 1991, but was mainly focused on performance
objectives such as opening wide networks/branches, development of rural areas, priority sector lending,
higher employment generation, etc. The accounting treatment also failed to project the problem of NPA,
as interest on loan accounts were accounted on additive basis.

11

A Committee on banking sector reforms known as Narasimham Committee was set up by RBI to study
the problems faced by Indian banking sector and to suggest measures revitalize the sector. The committee
identified NPA as a major threat and recommended prudential measures for income recognition, asset
classification and provisioning requirements. These measures lay their basis on transformation of the
Indian banking sector into a viable, competitive and vibrant sector. The committee recommended
measures to improve operational flexibility and functional autonomy so as to enhance efficiency,
productivity and profitability.
An evaluation of the Indian experience in financial sector reforms published in the RBI bulletin gives
stress on the view that the sustained improvement of the economic activity and growth is greatly
enhanced by the existence of a financial system developed in terms of both operational and allocation
efficiency in mobilizing savings and in channelizing them among competing demands.
It has been observed that the current banking scenario and the need for the policy change, suggests that a
major concern addressed by the banking sector reform is the improvement of the financial health of
banks. The introduction of prudential norms provides for better financial discipline by ensuring that the
banks are alert to the risk profile of their loan portfolios.
The Reserve Bank of India has also conducted a study to ascertain the contributing factors for the high
level of NPAs in the banks covering 800 top NPA accounts in 33 banks (RBI). The study has found that
the proportion of problem loans in case of Indian banking sector always been very high. The problem
loans of these banks, in fact, formed 17.91 percent of their gross advances as on March 31, 1989. This
proportion did not include the amounts locked up in industrial units. Hence, the proportion of problem
loans indeed was higher. However, the NPAs of Indian Banks declined to 17.44 percent as on March 31,
1997 after introduction of prudential norms. In case of many of the banks, the decline in ratio of NPAs
was mainly due to proportionately much higher rise in advances and a lower level of NPAs accretion after
1992. The major factors contributing to loans becoming NPAs include diversion of funds for expansion,
diversification, modernization, undertaking new projects and for helping associate concerns. Government
policies like changes in excise duties, pollution control orders, etc. The RBI concluded that reduction of

12

NPAs in banking sector should be treated as a national priority issue to make the Indian banking system
stronger, resilient and geared to meet the challenges of globalization.

Methodology
The current study confined to NPAs of Public sector banks only. For this secondary data have been
collected from annual report of RBI publications including Statistical Tables relating to Banks in India,
Articles and Papers relating to NPAs published in different journal and magazines were studied and data
available on internet and other sources used for analysis from March 2002 to 2013.
Tools of Data Analysis
The data collected from the secondary sources relating to NPAs has been analyzed and tabulated and
drawn the appropriate tables and used percentage also. Interpretations were made based on table,
Data Analysis:
Table No.1
Table showing the Total amount of NPAs at Public Sector Banks in India as on 31
st
March
(Amount in Billion)
Nationalized and SBI Group
Banks Total Amount of NPAs
% of Increase or Decrease in
NPAs
2004 501.48 -
2005 468.17 -6.64
2006 413.78 -11.62
2007 383.05 -7.43
2008 396.00 3.38
2009 440.32 11.19
2010 572.93 30.12
2011 710.80 24.06
2012 1124.89 58.26
2013 1558.90 38.58
Source: Department of Banking Supervision, RBI



13

Graph showing the Total amount of NPAs at Public Sector Banks in India as on 31
st
March
(Amount in Billion)


Interpretation
The above table and graph depicts the NPAs at public sectors banks in India as on 31st march from 2004
to 2013. From the above table it can also observe that the percentage of increase or decrease in NPAs of
public sector banks for last 9 years. From the above table and graph it can be seen that there was
reduction of NPAs from 2005 to 2006 by 6.64%, during 2006-07 it was decreased by 11.62%, during
2007-08 the NPAs reduction by 7.43% but from 2008 onwards NPAs are increasing in public sector
banks, during 2008-09 NPAs increased by 3.38%, and during 2009-10 NPAs increased by 11.19% as
against 3.38% of the previous year. During 2010-11 it increased by 30.12% as compared to its last year.
During 2011 and 2012 the NPAs reaches 58.26%.In 2012-13 we see that the NPA value has again
decreased to 38.58%.





0.00
200.00
400.00
600.00
800.00
1000.00
1200.00
1400.00
1600.00
1800.00
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

14


Table No. 2
Table showing the Total amount of NPAs at Nationalized Banks in India as on 31
st
March
(Amount in Billion)
Priority Sector Non-Priority Sector Public Sector Total

Bank
Group/Years Amount %Share Amount %Share Amount %Share Amount
2004 167.05 47.74 178.95 51.14 3.90 1.11 349.90
2005 163.81 51.17 153.46 47.94 2.83 0.88 320.10
2006 151.24 53.66 122.53 43.47 8.08 2.87 281.85
2007 157.79 61.28 96.68 37.55 3.02 1.17 257.49
2008 163.85 67.21 77.93 31.96 2.02 0.83 243.80
2009 157.21 60.10 101.40 38.76 2.97 1.14 261.58
2010 199.06 56.13 152.77 43.08 2.80 0.79 354.63
2011 257.21 59.90 169.47 39.47 2.73 0.64 429.41
2012 322.90 48.34 343.13 51.37 1.92 0.29 667.95
2013 404.86 42.21 553.59 57.71 0.78 0.08 959.23
Source: Department of Banking Supervision, RBI
Interpretation

The above table depicts the total amount and composition of NPAs of different sectors at nationalized
banks in India as on 31st march from 2004 to 2013. During 2004 Non-priority sector share was 51.14%,
Priority sector share was 47.74% and public sector was 1.11% in NPAs of Nationalized banks. During
2005 priority sector share was 51.17%, Non-priority sector share was 47.94% and public sector share was
0.88%. During 2006 Priority sector, Non priority sector and public sector share in NPAs of Nationalized
banks was 53.66%, 43.48% and 2.87% respectively. In the year 2007 priority sector share was 61.28%,
Non-priority sector share was 37.55% and public sector share was 1.17%. During 2008, priority sector
share was 67.21%, Non-priority sector 31.96% and public sector share was 0.83%. In the year 2009
priority sector, Non-priority sector and public sector share was 60.10%, 38.76% and 1.13% respectively
in the NPAs. In the year 2010 priority sector share was 56.13%, Non-priority sector share was 43.08 and
public sector share was 0.97% in NPAs, during year 2011 priority sector, Non-priority sector and public

15

sector share was 59.90%, 39.47% and 0.64% respectively. In the year 2012 priority sector share was
48.34%, Non-priority sector share was 51.37% and public sector share was 0.29%. And in the year 2013
priority sector was 42.21%, Non-priority sector share was 57.71% and public sector share was 0.08% in
the amount of NPAs of Nationalized banks in India.

Graph showing the Total amount of NPAs at Nationalized Banks in India as on 31
st
March
(Amount in Billion)


Inference:
From the above graph it can be inferred that during 2004, 2012, and 2013 Non-priority sector share in the
amount of NPAs of Nationalized banks is more as compared to priority and public sector. Priority sector
share in the amount of NPAs of Nationalized banks is more as compared to public sector share and non-
priority sector. At last from the above graph it can be inferred that Priority sector is troubling sector in the
generation of NPAs at Nationalized banks.


167.05
163.81
151.24
157.79
163.85
157.21
199.06
257.21
322.90
404.86
178.95
153.46
122.53
96.68
77.93
101.40
152.77
169.47
343.13
553.59
3.90 2.83
8.08
3.02 2.02 2.97 2.80 2.73 1.92 0.78
0.00
100.00
200.00
300.00
400.00
500.00
600.00
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Priority Sector Non-Priority Sector Public Sector

16


Table No.3
Table showing the Total amount of NPAs at SBI Group Banks in India as on 31
st
March
(Amount in Billion)
Priority Sector Non-Priority Sector Public Sector Total
Bank
group/
years Amount
%
Share Amount %Share Amount %Share Amount
2004 71.36 47.07 78.03 51.47 2.20 1.45 151.59
2005 70.17 47.38 76.24 51.48 1.68 1.13 148.09
2006 72.50 54.95 58.19 44.10 1.25 0.95 131.94
2007 71.75 57.14 51.93 41.36 1.88 1.50 125.56
2008 89.02 58.48 62.22 40.88 0.97 0.64 152.21
2009 84.47 47.26 92.50 51.75 1.77 0.99 178.74
2010 109.40 50.11 106.46 48.77 2.44 1.12 218.30
2011 155.67 55.32 125.67 44.66 0.06 0.02 281.40
2012 239.11 52.33 217.59 47.62 0.25 0.05 456.95
2013 264.42 44.09 334.94 55.85 0.31 0.05 599.67
Source: Department of Banking Supervision, RBI

Interpretation

The above table depicts total amount of NPAs at SBI Group banks in India as on 31st March from 2004
to 2013. The above table also depicts the sector wise share in the amount of NPAs of SBI Group in India.
From the above table it is observed that, in the year 2004 priority sector share was 47.07%, Non-priority
sector share was 51.48% and public sector share was 1.45% in the amount of NPAs of SBI Group banks.
During 2005, priority sector, Non-priority sector and public sector share was 47.39%, 51.48% and 1.13%
respectively. Similarly in 2006 the shares were 54.95%, 44.10% and 0.95% respectively, in 2007 shares
were 57.15%, 41.36% and 1.50%, in 2008 the shares were 58.49%, 40.88% and 0.63% respectively, in
2009 shares were 47.26%, 51.75% and 0.99% respectively, in 2010 shares were 50.11%, 48.77% and
1.12%, in 2011 shares were 55.32%, 44.66% and 0.02% respectively, in 2012 shares were 52.33%,

17

47.62% and 0.05% respectively and finally in 2013 the shares were 44.09%, 55.85% and 0.05%
respectively.


Graph showing the Total amount of NPAs at SBI Group Banks in India as on 31
st
March
(Amount in Billion)


Inference:

The above graph depicts the total amount of NPAs at SBI Group Banks in India as on 31st march from
2004 to 2013. And also the above graph depicts the composition of NPAs of different sector at SBI Group
Banks. From the above graph it can be inferred that during 2004 and 2005 non-priority sector share was
high in Creation of amount of NPAs in the SBI Group banks. From 2006 to 2012 Priority sector share
was high in generation of amount of NPAs in the SBI Group banks, during the year 2013 Non-priority
71.36 70.17
72.50 71.75
89.02
84.47
109.40
155.67
239.11
264.42
78.03
76.24
58.19
51.93
62.22
92.50
106.46
125.67
217.59
334.94
2.20 1.68 1.25 1.88 0.97 1.77 2.44
0.06 0.25 0.31
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
400.00
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Priority Sector Non-Priority Sector Public Sector

18

share was high in the creation of amount of NPAs in the SBI Group banks. At last from the above graph it
can be inferred that Priority sector is the troubling sector for SBI Group banks in the amount of NPAs.


Table No.4
Table showing the Total amount of NPAs at Nationalized Banks and SBI Group Banks in India as on
31
st
March (Amount in Billion)
Years
Amount of NPAs at Nationalized
Banks
Amount of NPAs at SBI Group
Banks
2004 349.9 151.59
2005 320.1 148.09
2006 281.85 131.94
2007 257.49 125.56
2008 243.8 152.21
2009 261.58 178.74
2010 354.63 218.3
2011 429.41 281.4
2012 667.95 456.95
2013 959.23 599.67
Source: Department of Banking Supervision, RBI

Interpretation

The above table depicts the total amount of NPAs at Nationalized banks and SBI Groups Banks in India
from 2004 to till as on 31st March 2013. During 2004 total amount of NPAs at Nationalized banks was
349.90 billion and SBI Groups banks were 151.59 billion. In the year 2005 it was 320 billion at
nationalized banks and 148.08 billion at SBI Groups banks. Similarly in 2006 NPAs were 281.85 billion
and 131.93 billion respectively, in 2007 they were 257.49 billion and 125.56 billion respectively, in 2008
they were 243.80 billion and 152.20 billion respectively, in 2009 they were 261.58 billion and 178.74
billion respectively, in they were 354.62 billion and 218.31 billion respectively, in 2010 they were 429.40
billion and 281.40 billion respectively, in they were 667.95 billion and 456.94 billion respectively and in
they were 959.22 billion and 599.67 billion respectively.

19






Graph showing the Total amount of NPAs at Nationalized Banks and SBI Group Banks in India as on
31
st
March (Amount in Billion)


Inference:
The above table depicts the Total amount of NPAs at Nationalized Sector Banks and SBI Groups Banks
in India from 2004 to 2013. From the above graph it can easily inferred that in the amount of NPAs in
Public Sector Banks, Nationalized banks share is very high, it can observed in the above graph, if we look
at the graph from 2004 to 2013 the NPAs in Nationalized banks are higher as compared to NPAs at SBI
Groups banks.



349.9
320.1
281.85
257.49
243.8
261.58
354.63
429.41
667.95
959.23
151.59 148.09
131.94 125.56
152.21
178.74
218.3
281.4
456.95
599.67
0
200
400
600
800
1000
1200
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Nationalised Banks SBI group Banks

20








Findings of the study:

1. From table No.1 it is found that from 2010 onwards there is more amount of NPAs in the
public sector banks in India
2. From the current study it is found that from table No.2 that Non-Priority sector share was
more in NPAs of Nationalized banks as compared to Priority sector and Public Sector in India
from as on 31st March 2004-2013.
3. From the table No. 3, it is found that SBI Groups banks are also the troubling sector in the
amount of NPAs.
4. From the existing study it is found that during 2004 Non priority sector contribution is more
for NPAs as compared to priority and public sector. From 2005 to till 2011 priority sector share
was high in the NPAs as compared to Non-priority and public sector. During 2011 priority and
non-priority sector share was almost equal in the creation of NPAs for public sector banks as
compared to public sector. During 2013 Non-priority share was high in creation of NPAs in
public sector banks as compared to priority and public sector.

Impact of NPAs on Bank`s Performance
As per prudential norms, income should not be recognized on accrual basis. It should only be booked
when it is received. Thus, in measuring the efficiency of banks, actual return on assets is considered as
superior parameter than that of size of income in the balance sheet. The impact of NPAs on different
financial parameters is stated below:

21

Profitability
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 does not 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.
Liquidity
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.
Involvement of Management
Time and efforts of management in handling and managing NPA would have diverted to some fruitful
activities, which would have given good returns. Now days, banks have special employees to deal and
handle NPAs, which is additional cost to the bank.
Credit Loss
If a bank is facing problem of NPA, then it adversely affects the value of bank in terms of market for
credit. It will lose its goodwill, brand image and credit which have negative impact to the people who are
putting in their money in the banks.

Impact of NPAs on Indian Economy

Undoubtedly the world economy has slowed down due to 2008 economic recession and globally stock
markets have fallen and business itself is suffering. The Indian economy has been affected due to high
fiscal deficit, poor infrastructure facilities, sticky legal system, cutting of exposures to emerging markets
by FIIs etc. Further, international rating agencies like, Standard & Poor have lowered India's credit rating
to sub-investment grade. Such negative aspects have often outweighed positives such as increasing forex
reserves and a manageable inflation rate. Under such a situation, it goes without saying that banks are no

22

exception and are bound to face the heat of a global downturn. Bankers have realized that unless the level
of NPAs is reduced drastically, they will find it difficult to survive. The actual level of Non-Performing
Assets in India is around $40 billion, much higher than governments estimation of $20 billion. This
difference is largely due to the discrepancy in accounting the NPAs followed by India and rest of the
world.

Reasons for NPAs in India

An internal study conducted by the RBI shows that in the order of importance, the following
factors contribute to NPAs:
Internal Factors
Diversion of funds for
Expansion/diversification/modernization.
Taking up new projects.
Helping/promoting associate concerns.
Time/cost overrun during the project implementation.
Inefficient management.
Strained labor relations.
Inappropriate technology/technical problems.

External Factors
Recession.
Input or power shortage.
Price escalation.
Exchange rate fluctuation.
Accidents and natural calamities.
Changes in government policy such as excise, import and export duties, pollution control order etc.

23

Willful defaulters have been there because they knew that legal recourse available to the lenders is time
consuming and slow.
Sickness of the industry also leads to gradual erosion of the liquidity and units start failing to honor its
responsibilities for the loan payments.
Manipulation by the debtors using political influence has been a cause for high industrial bad debts.

Impact of Priority Sector Advances on NPAs in India

For persistent and stable growth of the nation there is a need of proper distribution of scarce resources
including finance. Generally it is considered that 40% of the net bank credit which is sanctioned to
priority sectors has led to higher level of NPAs because most of the projects became white elephant and
credit to these sectors become sticky. NPAs as percentage of advances to priority sectors have always
been lower than those in non-priority sector and it is hard and fast fact that advances to these sectors are
becoming NPAs. Banks have to give much careful attention to non-priority sector lending rather than
priority sector as it is the area where the bankers have to be cautious in lending and have to examine the
possibilities of loans becoming non-performing. Here the question of regulation, implementation of
existing law, moral threat, adverse selection and credit rationing comes to fore and these issues need
proper exposure and awareness and judicious action. This will ultimately explode the commonly held
credence and myth that the problem of NPAs is a result of credit allocation to priority sector.

Tackling NPAs

Asset quality in the banking system has deteriorated in the post-crisis years and among banks groups,
PSBs had the highest level of stress in terms of NPAs and restructured advances. The RBI in its Financial
Stability Report, December 2013 has identified five sectorsinfrastructure, iron and steel, textiles,
aviation, and miningas the stressed sectors. PSBs have high exposures to the industry sector in
general and to such stressed sectors in particular. Increase in NPAs of banks is mainly accounted for by

24

switchover to system-based identification of NPAs by PSBs, slowdown of economic growth, and
aggressive lending by banks in the past, especially during good times.
Some recent initiatives taken by the government to address the rising NPAs include:
Appointment of nodal officers in banks for recovery at their head offices/zonal offices/for each
Debts Recovery Tribunal (DRT).
Thrust on recovery of loss assets by banks and designating asset reconstruction companies (ARC)
resolution agents of banks.
Directing the state-level bankers committees to be proactive in resolving issues with the state
governments.
Sanction of fresh loans on the basis of information sharing amongst banks.
Conducting sector / activity-wise analysis of NPAs
Close watch on NPAs by picking up early warning signals and ensuring timely corrective steps
by banks including early detection of sign of distress, amendments in recovery laws, and
strengthening of credit appraisal and post credit monitoring.
Increased provision for restructured standard accounts to 2.75 per cent from 2.00 per cent
Increased provision for new restructured standard accounts to 5 per cent up from 3.75 per cent
w.e.f. 31st March 2015 spread over the four quarters of 2014-15.
RBI releases Discussion Paper on Framework for Revitalizing Distressed Assets in the
Economy:
The Reserve Bank of India today released on its website a Discussion Paper on Early
Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders:
Framework for Revitalizing Distressed Assets in the Economy. The Discussion Paper outlines a
corrective action plan that will incentivize early identification of problem cases, timely
restructuring of accounts which are considered to be viable, and taking prompt steps by banks for
recovery or sale of unviable accounts.

25

The main proposals in the Discussion Paper are summarized below:
Early formation of a lenders committee with timelines to agree to a plan for resolution.
Incentives for lenders to agree collectively and quickly to a plan better regulatory treatment of
stressed assets if a resolution plan is underway, accelerated provisioning if no agreement can be
reached.
Improvement in current restructuring process: Independent evaluation of large value
restructurings mandated, with a focus on viable plans and a fair sharing of losses (and future
possible upside) between promoters and creditors.
More expensive future borrowing for borrowers who do not co-operate with lenders in resolution.
a. More liberal regulatory treatment of asset sales
b. Lender can spread loss on sale over two years provided loss is fully disclosed.
c. Takeout financing/refinancing possible over a longer period and will not be
construed as restructuring.
d. Leveraged buyouts will be allowed for specialized entities for acquisition of stressed
companies.
e. Steps to enable better functioning of Asset Reconstruction Companies mooted.
f. Sector-specific Companies/Private equity firms encouraged to play active role in stressed
assets market.








26



Suggestions
Banks have to strengthen their credit management system right from the selection of borrowers to
the recovery of loans.
Pre-sanction surveys, selection of borrower, post sanction verification, ensuring end use after
disbursement, close review of the unit, recovery, etc. to be done systematically.
Sub-standard assets are to be concentrated and immediate follow-up to upgrade them to standard
assets will prevent the creation of new NPAs and will reduce volume of NPAs.
Banks must make use of assets Reconstruction Company to transfer their doubtful and loss assets
in order to arrest the blockade in funds flow.
Banks must have special group/team for recovery and follow-up of advances to minimize NPAs.
Conclusions
Quality of loan assets is the most important factor for the basic viability of the banking system. Lower
level of NPAs helps the banks in consolidating their position and gives credence to efficiency of the
management. Curative measures are required to recover money out of assets, which have already fallen
into NPA category. Normally after sanctioning and disbursement of loans, the banks should have an
effective follow up, monitoring and supervision over credit. Many bankers feel that their responsibility
comes to an end when loans are disbursed because of which the problem of the borrower is understood
only when the default occurs. This causes slow and ineffective recovery of bank credit, lacuna in credit
recovery system, etc. Some of the paths available for the banks to step up their recovery portfolio are:
One time settlement/compromise scheme
Debt Recovery Tribunals

27

Securitization and Reconstruction of Financial assets and Enforcement of Security Interest Act
2002
Corporate Reconstruction Companies
Credit information on defaulters and role of Credit Information Bureaus
Thus, it is obvious that the Non-Performing Assets in India have adversely affected the profitability and
efficient functioning of banks. The present scenario shows that NPA levels have come down despite
substantial growth in credit. NPAs have negative impact on the productivity, achievement of capital
adequacy level, funds deployment and mobilization policy, credibility of the banking system and overall
economy.
Concerted efforts are required at Ministry of Finance, RBI and at banks level to control the menace of
NPAs. When backed by a strong political will, the Indian banks will be able to find satisfactory solution
to the problem of mounting Non-Performing Assets.




28


Bibliography
1) RBI.org.in.
2) Project Reports on Non-performing Assets (NPAs) in Banking Industry by Aditi Shah in Others
category on Management Paradise.
3) The quarterly journal of Indian Finance Vol.27 no 1 March 2013.
4) Non-performing assets-A practical Handbook by Rathi G & Sandhane M.
5) Economic Survey of India (2013-14) http://indiabudget.nic.in/.
6) Role Of Non-Performing Assets in the risk framework of commercial banks A study of commercial
banks by Sikdar P & Makkad M.
7) Growing NPAs in Banks Efficacy of credit rating agencies (PWC).
8) Performance of Non Performing Assets (NPAs) in Indian Commercial banks by Ms. Singh A.