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NON- PERFORMING ASSETS AND THE SURVIVABILITY OF BANKS

Maneesh Kant Arya
Associate Professor, Institute of Management Studies DAVV, Indore (M.P.) India Email
maneesharya@gmail.com

ABSTRACT
There are many mergers and acquisitions have been taken place in Indian banking industry in last couple of
decade. Many reason behind it but one question is always associated that the survivability of weaker financial
organization. Competition insists organizations to justify the earning and profitability. Reserve Bank of India
(RBI) and other regulatory framework control the banking industry and individual bank. Banks cannot make big
profit without giving good quality of services to their customers. Banks survive with high turnover of fund and
low margin. If there is undue losses like Non Performing Assets (NPA) and other deliquesce cost come in the
part of expenses banks reduce their profit. There may be negative profit in the income statement.
India banks hold non-performing assets worth Rs. 1,93,5080 crores. Bankers have realized that unless the level
of NPAs is reduced drastically, they will find it difficult to survive. 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 (RBI), a bank cannot book interest on an NPA on accrual basis. 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.
Objective of the study: To analyze Non Performing Assets of different banks groups for sustainability of
Indian Banks in present financial environment.

MEANING
The three letters NPA Strike terror in banking

guidelines relating to assets classification issued

sector and business circle today. NPA is short form

by RBI .

of Non Performing Asset. The dreaded NPA rule

An amount due under any credit facility

is

says simply this: when interest or other due to a

treated as past due when it is not been paid

bank remains unpaid for more than 90 days, the

within 30 days from the due date. Due to the

entire bank loan automatically turns a non

improvement in the payment and settlement

performing asset. The recovery of loan has always

system,

been problem for banks and financial institution.

technology in the banking system etc, it was

Action for enforcement of security interest can be

decided to dispense with past due concept, with

initiated only if the secured asset is classified as

effect from March 31, 2001. Accordingly as from

Non-performing asset.

that date, a Non performing asset shell be an

Non-performing asset means an asset or account of

advance where

borrower ,which has been classified by bank or

Interest and/or installment of principal remain

financial institution as sub standard , doubtful or

overdue for a period of more than 180 days in

loss asset, in accordance with the direction or

respect of a term loan,

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The account remains outstanding (Out of Order) for

The bill remains overdue for a period of more than

a period of more than 180 days in respect of an

180 days in case of bill purchased or discounted.

overdraft/cash credit (OD/CC).

Interest and/or principal remains overdue for two

investment), which adversely affect current earning

crop season but for a period not exceeding two half

of bank.

years in case of an advance granted for agricultural

purpose, and

Liquidity:

Any amount to be received remains overdue for a

Neither principal amount nor interest amount is

period of more than 180 days in respect of other

being received to the banks against the assets. The

accounts.

mobilisation of fund is stopped. It affects liquidity

With a view to moving towards international best

of fund. It is difficulty in operating the functions.

practices and to ensure greater transparency, it has

been decided to adopt 90 days overdue norms for

Involvement of management:

identification of NPAs, from the year ending

Time and efforts of management is another indirect

March 31, 2004, a non performing asset shell be a

cost which bank has to bear due to NPA. Time and

loan or an advance where;

efforts of management in handling and managing

Out of order

NPA would have diverted to some

An account should be treated as out of order if the

activities, which would have given good returns.

outstanding balance remains continuously in excess

Now days banks have special employees to deal

of sanctioned limit /drawing power. in case where

and handle NPAs, which is additional cost to the

the outstanding balance in the principal operating

bank.

account

is less than the sanctioned amount

/drawing

power,

continuously

but

there

are

no

credits

fruitful

Credit loss

for six months as on the date of

Bank is facing problem of NPA then it adversely

balance sheet or credit are not enough to cover the

affect the value of bank in terms of market credit. It

interest

will lose its goodwill and brand image and credit

debited during the same period ,these

account should be treated as out of order.

which have negative impact to the people who are

Overdue

putting their money in the banks.

Any amount due to the bank under any credit

facility is overdue if it is not

paid on due date

fixed by the bank.

Regulatory measures have been taken to

strengthen the Indian Banking sectors

(Details taken from RBI guidelines)

The important measures taken to strengthen the

Impact of NPA:

banking sector are briefly, the following:

Profitability:

Introduction of capital adequacy standards on the

NPA doesnt affect current profit but also future

lines of the Basel norms,

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

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Prudential norms on asset classification, income

Reddy (2004) and lazy banking owing to Mohan

recognition and provisioning,

(2003) has an international perspective since

Introduction of valuation norms and capital for

several studies in the banking literature agree that

market risk for investments

banks lending policy is a major driver of non-

Enhancing

transparency

and

disclosure

performing loans (McGoven, 1993). Furthermore,

requirements for published accounts,

in the context of NPAs on account of priority sector

Aligning exposure norms single borrower and

lending, it was pointed out that the statistics may or

group-borrower ceiling with inter-national

may not confirm this. There may be only a

best

practices

marginal difference in the NPAs of banks lending

Introduction of off-site monitoring system and

to priority sector and the banks lending to private

strengthening of the supervisory framework for

corporate sector. Against this background, the

banks.

study suggests that given the deficiencies in these

areas, it is imperative that banks need to be guided

LITERATURE REVIEW

by fairness based on economic and financial

Bhattacharya (2001) in his paper Banking

decisions rather than system of conventions, if

Strategy, Credit Appraisal & Lending decision

reform has to serve the meaningful purpose.

rightly points to the fact that in an increasing rate

Experience shows that policies of liberalisation,

regime, quality borrowers would switch over to

deregulation

other avenues such as capital markets, internal

comfortable liquidity at a reasonable price do not

accruals for their requirement of funds. Under such

automatically translate themselves into enhanced

circumstances, banks would have no option but to

credit flow. Although public sector banks have

dilute the quality of borrowers thereby increasing

recorded improvements in profitability, efficiency

the probability of generation of NPAs.

(in terms of intermediation costs) and asset quality

Mohan (2003) conceptualized lazy banking

in the 1990s, they continue to have higher interest

while critically reflecting on banks investment

rate spreads but at the same time earn lower rates

portfolio and lending policy. The Indian viewpoint

of

alluding to the concepts of credit culture owing to

(Mohan,2004).

Prashanth K Reddy (2002) in his work A

Santanu das (2007) in his work Management of

comparative study of Non Performing Assets in

Non-Performing Assets in Indian Public Sector

India in the Global context - similarities and

Banks with special reference to Jharkhand had

dissimilarities, remedial measures by evaluated

taken a state specific research in the banking sector.

the position of India with respect to other countries

He rightly points to the fact that Expansion of

in terms of NPA. This paper deals with the

credit is a must for a country like India. But as

experiences of other Asian countries in handling of

mentioned above, high credit growth may lead to

NPAs. It further looks into the effect of the reforms

high NPAs. Policymakers, therefore, face the

on the level of NPAs and suggests mechanisms to

dilemma as to how to minimize such risks that arise

handle the problem by drawing on experiences

from dilution in credit quality, while still allowing

from other countries.

bank lending to contribute to higher growth and

return,

and

enabling

reflecting

higher

environment

operating

of

costs

efficiency.

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public and private sector banks NPA and their

Jigar j. Soni (2007) in his study of comparative

handling of the same. He also concluded that public

analysis of private and public sectors NPA

sector banks average NPA is lesser than the

pointed out that there is a huge difference in the

average

awar Ashok and Arya Maneesh Kant (2009)

Non-Performing

discussed about the wage burden after a revision of

mismatch in banks and financial sector depend on

salary of bank employees and profitability of

how various risks are managed in their business.

NPA

of

private

Assets

sector

(NPA)

banks.

and

Jh

liability

banks. Arya Maneesh Kant and Sonwalkar J.

(2009), discussed the effect on profitability and

RESEARCH METHODOLOGY

volatility of income with non interest income of

The research is based on secondary data obtained

banks.

from RBI, IBA and some researchers have already

been done in the same fields. Data has been taken

Sachin

Nanda

(2008)

finds

in

paper

for the period 2005-2009. The period is considered

Challenges of NPA to PSBs in India is that the

for the research because of RBI issued new

only problem that the Public Sector Banks are

guideline for management and administrates the

facing today is the problem of nonperforming

NPA. Ratios, growth, graphs and charts have been

assets. If the proper management of the NPAs is

used for analysis purpose.

not undertaken it would hamper the business of the

Key Words:

banks. The NPAs would destroy the current profit,

NPA Non Performing Assets

interest income due to large provisions of the

NNPA- Net Non Performing Assets

NPAs, and would affect the smooth functioning of

NIM- Net Interest Margin

the recycling of the funds.

Capital Adequacy

M. Karunakar, Mrs. K.Vasuki and Mr. S.

RBI- Reserve Bank of India

Saravanan in their research paper

his

Are non -

Performing Assets Gloomy or Greedy from

Indian Perspective touched the ascpect such as
The problem of losses and lower profitability of

Data Analysis and Interpretation

TABLE - 01 Gross Non-Performing Assets of All Three Bank Groups During 2005-09
Rs. In crores
Bank Groups

2004-05

2005-06

2006-07

2007-08

2008-09

Public Sector Bank

48405

42105

38968

40452

Private Sector Bank

8546

7720

9255

Foreign Bank

2183

1919

TOTAL

59134

51744

%change in Avg. growth of

5 years

5 years

45156

-6.71

-1.34

12997

16863

97.32

19.46

2263

2872

6807

211.82

42.36

50486

56321

68826

16.39

3.28

The measure of non-performing assets helps to assess the efficiency in allocation of resources made by banks to
productive sectors. Absolute growth of gross NPA of banking industry has been recorded 16.39% with average

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of 3.28%. Public Sector banks managed their NPA efficiently in2004-05 to 2008-09. Negative growth has been
seen in the analysis period. Higher growth has been in Private Sector banks and foreign banks.
TABLE - 02Net NPA of All Three Bank Groups During 2005-2009
Rs. In crores

Bank Groups

2004-05

2005-06

2006-07

2007-08

2008-09

%change in 5
years

Avg.
growth of 5
years

Public Sector Bank

16903

14384

15325

17836

21033

24.43

4.89

Private Sector Bank

4094

3141

4028

5647

7395

80.63

16.13

Foreign Bank

648

806

927

1254

2973

358.80

71.76

TOTAL

21645

18331

20280

24737

31401

45.07

9.01

Net NPA analysis has also been showing the same performance of different groups. Foreign banks groups Net
NPA is 71.76% with highest average growth, 16.13% of Private Sector and with 4.89% Public Sector banks.
The trend of improvement in the assets quality of banks continued during the period.
The reasons are that the Indian banks could recover a higher amount of NPA during the period. Among the
various channels of recovery available to banks for dealing with bad loans, the SAFAESI Act and Debt
Recovery tribunals (DRTs) have been most effective in term of amount recovered (report on trend and progress
of banks 08-09).

Table 03.Net NPA as A Percentage of Net Advance

Bank Groups

2004-05

2005-06

2006-07

2007-08

2008-09

Public Sector Bank

2.1

1.32

1.08

1.08

0.94

Private Sector Bank

2.3

1.21

1.44

0.9

1.21

Foreign Bank

0.9

0.83

0.76

0.77

1.09

TOTAL

1.98

1.25

1.05

1.02

1.07

The aggregate ratio of banking industry (Net

banks group 1.09% followed by Private Sector

NPA/Net Advances ratio) was1.98% in 2004-05

banks group 1.21%.

.Of this the net NPAs to net advances ratio of the

There are many reasons to this change the most

Private Sector Banks was 2.3% closely followed by

important reason was Public and Private Sector

Public Sector Bank sat 2.1% For Foreign Banks,

banks

the ratio was much lower at 0.9%.

numerous methods. In addition to their own

In the year 2008-08 situation was just reveres.

internal recovery processes, banks recovered to the

Public Sector banks group with 0.94%, Foreign

tune of Rs 608 crore through one time settlement

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and compromise schemes, Rs 223 crore though

BIBLIOGRAPHY

SARFAESI Act. Assets Reconstruction Company

of India Ltd. (ARCIL) acquired 559 cases

BOOKS REFERRED:

amounting to Rs 21126 crore from banks.

Conclusion and recommendations:

Management of banking and financial services-

Banks are having Net Interest Margin (NIM)

justin paul and padamlata suresh Banking and law

between 3 to 5 percent any increase in NPA reduce

practices-gordan and natrajan

the profitability of banks. The banks which are

working in marginal difference may have loss.

WEBSITES VISITED:

Small banks are required to control NPA. There are

many small banks which have been merged in big

www.bioinfo.in/uploadfiles,ICICIdirect.com,ICICI.

banks i.e. Lord Krishna, Centurion Bank, Bank of

com, valuenotes.com. Birlaa.com, RBI.org, Indian

Panjab etc. it is just because of question of

Banks Association.Bloomberg.com

survivability in competitive environment.

Merger and acquisitions are good solutions for

RESEARCH REPORTS- found with the help of

giving strength to an organization but in this

Google search engine.

process an organization/s lose their identity. There

Bhattacharya, H (2001), Banking Strategy, Credit

are many mergers have been taken place in banking

Appraisal

industry in these changes one organization has to

University Press, New Delhi.

&

Lending

Decisions,

Oxford

change /lose its identity. This may be due to

continuous loss in the organization.
1.

Strengthening provision

norms and

McGoven, J (1998): Why Bad Loans happen to

loan

classification standards based on forward looking

Good

Banks,

The

Journal Of Commercial

Lending, Philadelphia, February 1998, Vol.78.

criteria (like future cash flows) were implemented.

2. Through securitization they can reduce NPA

Mohan, R (2003): Transforming Indian Banking

3. Speed of action- the speedy containment of

In search of a better tomorrow, Reserve Bank of

systematic risk and the domestic credit crunch

India Bulletin, January

problem with the injection of large public fund for

bank recapitalization are critical steps towards

Reddy, Y.V (2004): Credit Policy, Systems and

normalizing the financial system.

Culture, RBI Bulletin, March

4. Strengthening legal system by giving strict

guideline for credit analysis in terms of continuity

Sachin Nanda (2008) A report On NPA an d

of income and earnings.

Challenges to PSBs

5. Maintain required capital adequacy ratio as per

Basel II norms. That means now the provision for

Jigar J soni (2007) Comparative analysis of NPAs

NPA will be more. This may look a conservative

of private and public sector banks

approach. But it should be implemented to reduce

risk. ( Almost all banks achieved capital adequacy

Prastanth K reddy (2002) comparative study of

norms till date.)

Non Performing Assets in India in the Global

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context - similarities and dissimilarities, remedial

Balasubramaniam C.S.,Non Performing Assets

measures, IIM Ahmadabad research journal

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Shantanu das (2007)study of NPA w.r.t Jharakand

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Emerging

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Sayuri Shirai; Assessment of Indian banking

Aug 24, 2013, 01.40AM IST.

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Bad debt and NPA: making sense of banking mess

governance of the banking sector; (2001).ESCAP-

Alam Srinivas | September 07 2013.

ADB Joint workshop on mobilizing domestic

finance for development BANGKOK 22-23 Nov
2001.

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