A Study On Management of Non-Performing Assets in Context of Indian Banking System
A Study On Management of Non-Performing Assets in Context of Indian Banking System
A Study On Management of Non-Performing Assets in Context of Indian Banking System
IJETMR
A STUDY ON MANAGEMENT OF NON-PERFORMING ASSETS IN
CONTEXT OF INDIAN BANKING SYSTEM
Ankit Garg *1
*1
Research Scholar, Punjabi University, Patiala, INDIA
DOI: https://doi.org/10.5281/zenodo.221331
Abstract:
Non-performing Asset is one of the prevalent problem of Indian Banking sector. For the past
three decades, the banking system has several outstanding achievements to its credit. Many
banks are facing the problem of NPAs which hampers the business of the banks. Non-
performing assets are a drain to the banks. Various research studies have been conducted to
analyze the root causes of NPA. The following study tries to understand the concept of NPA,
its causes and impact on profitability. The problem of NPA impacts profitability, Liquidity and
results in credit loss. Unless and otherwise proper remedial measures are taken the quantum
of non-performing assets cannot be reduced and the bank will incur losses to a great extent.
Keywords:
NPA, Bank, Profitability, Lending.
1. INTRODUCTION
In the growth of economic development, the function of banking sector has always been
commendable. It is the potency and input of the banking system can have far-reaching
implications on the development of the whole economy. The link between the financial sector
and economic growth has been the subject of a large literature. Many researchers have studied
that there is strong empirical evidence today of that robust financial markets support economic
growth. This is particularly relevant at the present time also when there is a lot of stress in the
financial markets globally and consequently a slowdown in the momentum of economic growth.
Keeping in view the essence of the banking system, policies are designed for proper regulation of
banks. In India, after the nationalization of banks in 1969, the geographical presence of the
banking system increased considerably but the profitability and economic viability of various
branches were negatively impacted due to increased cost of maintenance and lending to masses
at reasonable cost considering the social objective of banking sector in the growth of economy.
Despite utmost care taken by Government and banking regulations, many assets or loans of the
bank get converted into bad debts and stop generating any income for the bank. Such assets or
loans are referred to as non-performing assets (NPAs) or non-performing loans (NPLs).Non-
The banking sector has been facing the serious problems of the rising NPAs. But the problem of
NPAs is more in public sector banks when compared to private sector banks and foreign banks.
The NPAs in PSB are growing due to external as well as internal factors
EXTERNAL FACTORS
Ineffective Recover
The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and
advances. Due to their negligence and ineffectiveness in their work the bank suffers the
consequence of non-recover, thereby reducing their profitability and liquidity.
Willful Defaults
There are borrowers who are able to pay back loans but are intentionally withdrawing it. These
groups of people should be identified and proper measures should be taken in order to get back
the money extended to them as advances and loans.
Natural Calamities
This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and
then India is hit by major natural calamities thus making the borrowers unable to pay back there
loans. Thus the bank has to make large amount of provisions in order to compensate those loans,
hence end up the fiscal with a reduced profit.
Industrial Sickness
Improper project handling , ineffective management , lack of adequate resources, lack of advance
technology , day to day changing govt. Policies give birth to industrial sickness. Hence the banks
that finance those industries ultimately end up with a low recovery of their loans reducing their
profit and liquidity.
Lack of Demand
Entrepreneurs in India could not foresee their product demand and starts production which
ultimately piles up their product thus making them unable to pay back the money they borrow to
operate these activities. The banks recover the amount by selling of their assets, which covers a
minimum label. Thus the banks record the non-recovered part as NPAs and has to make
provision for it.
Change on Govt. Policies
With every new govt. banking sector gets new policies for its operation. Thus it has to cope with
the changing principles and policies for the regulation of the rising of NPAs.
2. LITERATURE REVIEW
There are many studies conducted on the issue of Non-Performing Asset Management in Indian
Banks, following is the review of few literatures about the NPA Practices and Management
conducted for Banks in India.
Arora and Ostwal (2014) the present paper analyses the classification and comparison of loan
assets of public and private sector banks. The study concluded that NPAs are still a danger for
the banks and financial institutions and in comparison to private sector banks; public sector
banks have higher level of NPAs.
Srinivas K T (2013) emphasis on identify the Non-performing assets at Commercial banks in
India. This paper highlights the various general reasons which convert advances/ assets into NPA
and also give suitable suggestion on findings to overcome the mentioned problem.
Singh (2013) in his paper entitled Recovery of NPAs in Indian commercial banks says that the
origin of the problem of burgeoning NPA’s lies in the system of credit risk management by the
banks. Banks are required to have adequate preventive measures in fixing pre-sanctioning
appraisal responsibility and an effective post-disbursement supervision.
After studying various research papers and articles, besides the abovementioned, the following
important observations with regard to Non-Performing Assets can be made:
a) The problem of NPA has arisen due to basic objective behind lending of public sector
banks that is social welfare. In most of the cases, the bank has to keep into consideration
the objective of social welfare and uniform economic growth.
b) The problem of NPA is more prevalent and serious in case of Public sector banks in
comparison to Private Sector banks because of the philosophy being followed by Public
Sector banks and lack of managerial skills to assess the credit worthiness of the borrower.
To some extent, political reasons can also be held accountable for the same.
c) Economic conditions along with lack of due diligence by banks can be considered as
main reasons for mounting of NPAs in Banks.
d) Among the various parameters being used for assessing the efficiency of banks and
financial institutions, the level of NPA of the respective institution/bank is considered
very important.
Non-performing assets of banks are one of the biggest hurdles in the way of socio-economic
development of India. The level of NPAs of the banking system in India is still too high. It
affects the financial standing of the banks so that it is a heavy burden to the banks. A vigorous
effort has to be made by the banks to strengthen their internal control and risk management
systems and to setup early warning signals for timely detection and action. The problem of
NPAs is tied up with the issue of legal reforms. This is an area which requires urgent
consideration as the present system that substantially delays in arriving at a legal solution of a
dispute is simply not tenable. The absence of a quick and efficient system of legal redress
constitutes an important ‘moral hazard’ in the financial sector, as it encourages imprudent
borrowers.
5. RESEARCH METHODOLOGY
This chapter presents the brief outline of various dimensions of the research, tools and
techniques and methods used to achieve various research objectives has been discussed.
RESEARCH DESIGN
The methodology for this research is designed considering the above facets. In order to
accomplish the stated objectives, the researcher will utilize a combined approach that embraces
features of both descriptive and analytical research designs.
DATA SOURCES
Data will be gathered from the secondary sources to achieve the stated objectives. It includes:
Annual reports of the bank
RBI Report on Trend and Progress of Banking in India
6. FINDINGS
IMPACT OF NPA
1) 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 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 earnings of bank.
2) 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, routine payments and dues.
3) Involvement of Management: 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.
4) Credit Loss: 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) Early Recognition of the Problem: Invariably, by the time banks start their efforts to
get involved in a revival process, it too late to retrieve the situation- both in terms of
rehabilitation of the project and recovery of bank’s dues.
2) Identifying Borrowers with genuine intent: Identifying borrowers with genuine intent
from those who are non- serious with no commitment or stake in revival is a challenge
confronting bankers. Here the role of frontline officials at the branch level is paramount
as they are the ones who have intelligent inputs with regard to promoters sincerity, and
capability to achieve turnaround. Based on this objective assessment, banks should
decide as quickly as possible whether it would be worthwhile to commit additional
finance. "Special Investigation"
3) Timeliness & Adequacy of response: Longer the delay in response, grater the injury to
the account and the asset. Time is a crucial element in any restructuring or rehabilitation
activity. The response decided on the basis of techno-economic study and promoter s
commitment, has to be adequate in terms of extend of additional funding and relaxations
etc. Under the restructuring exercise, the package of assistance may be flexible and bank
may look at the exit option.
1) Internal Checks and Control: Since high level of NPAs dampens the performance of
the banks identification of potential problem accounts and their close monitoring assumes
importance. Though most banks have Early Warning Systems (EWS) for identification of
potential NPAs, the actual processes followed, however, differ from bank to bank. The
EWS enable a bank to identify the borrower accounts which show signs of credit
deterioration and initiate remedial action. Many banks have evolved and adopted an
elaborate EWS, which allows them to identify potential distress signals and plan their
options beforehand, accordingly. The major components/processes of a EWS followed by
banks in India as brought out by a study conducted by Reserve Bank of India at the
instance of the Board of Financial Supervision are as follows:
i. Relationship Manager/Credit Officer: The Relationship Manager/Credit Officer is an
official who is expected to have complete knowledge of borrower, his business, his future
plans, etc. The Relationship Manager has to keep in constant touch with the borrower and
report all developments impacting borrow able account.
ii. Know your client ' profile (KYC): Most banks in India have a system of preparing
`know your client' (KYC) profile/credit report. As a part of `KYC' system, visits are
made on clients and their places of business/units.
iii. Credit Rating System: The credit rating system is essentially one point indicator of an
individual credit exposure and is used to identify measure and monitor the credit risk of
individual proposal
iv. Watch-list/Special Mention Category: The grading of the bank's risk assets is an
important internal control tool. It serves the need of the Management to identify and
monitor potential risks of a loan asset. The purpose of identification of potential NPAs is
to ensure that appropriate preventive / corrective steps could be initiated by the bank to
protect against the loan asset becoming non-performing.
1) One Time Settlement Schemes: NPAs in all sectors, which have become doubtful or
loss as on 31st March 2000. The scheme also covers NPAs classified as sub- standard as
on 31st March 2000, which have subsequently become doubtful or loss. All cases on
which the banks have initiated action under the SRFAESI Act and also cases pending
before Courts/DRTs/BIFR, subject to consent decree being obtained from the
Courts/DRTs/BIFR are covered. However cases of willful default, fraud and malfeasance
are not covered. As per the OTS scheme, for NPAs up to Rs. 10crores, the minimum
amount that should be recovered should be 100% of the outstanding balance in the
account.
2) Negotiated Settlement Schemes: The RBI/Government has been encouraging banks to
design and implement policies for negotiated settlements, particularly for old and
unresolved NPAs. The broad framework for such settlements was put in place in July
1995.
7. REFERENCES
[1] Bhole, L.M.(2007). Financial Institutions and Market. New Delhi. : The Mc Graw Hill.