After liberalization the Indian banking sector developed very appreciate. The RBI alsonationalized good amount of commercial banks providing socio economic services to the people of the nation. The public Sector banks have shown very good performance as far as the financialoperations are concerned. The total income of the public sector banks has also shown good performance since the last few years. The public sector Banks have shown comparatively goodresult. The gross profits and the net profits of the Public Sector banks have been on a high from pastfew years. The private sector banks are also showing good results in case of profits. However, theonly problem of the Scheduled Commercial Banks these days are the increasing level of the non performing assets. The Non-Performing Assets (NPAs) problem is one of the foremost and the mostformidable problems that have shaken the entire banking industry in India like an earthquake. Likea canker worm, it has been eating the banking system from within, since long. It has grown like acancer and has infected every limb of the banking system.At macro level, NPAs have choked off the supply line of credit to the potential borrowers,thereby having a deleterious effect on capital formation and arresting the economic activity in thecountry. At the micro level, the unsustainable level of NPAs has eroded the profitability of banksthrough reduced interest income and provisioning requirements, besides restricting the recycling of funds leading to serious asset liability mismatches. The problem of NPAs is not a matter of concernfor the lenders alone. It is a matter of grave concern to the public as well, as bank credit is thecatalyst to the economic growth of the country and any bottleneck in the smooth flow of credit, onecause for which is mounting NPAs, is bound to create adverse repercussions in the economy.Mounting menace of NPA has raised the cost of credit, made banks more adverse to risk andsqueezed genuine small and medium enterprise from accessing competitive credit and has throttledtheir enterprising spirits as well.The spiraling and the devastating effect of NPA on the economy have made the problem of NPA as issue of public debate and of national priority. Therefore, any measure or reform on thisfront would be inadequate and incomprehensive, if it fails to make a dent in NPA reduction andstall their growth in future, as well.
NPAs have deleterious effect on the return on assets in several ways: ---(1) They erode current profits through provisioning requirements(2) They result in reduced interest income(3) They require higher providing requirements affecting profits and accretion to Capital fundsrecycling of funds, set in asset-liability mismatches, etc.