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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
sector and business circle today. NPA is short form
of Non Performing Asset. The dreaded NPA rule
says simply this: when interest or other due to a
bank remains unpaid for more than 90 days, the
entire bank loan automatically turns a non
performing asset. The recovery of loan has always
been problem for banks and financial institution.
Action for enforcement of security interest can be
initiated only if the secured asset is classified as
Non-performing asset.
Non-performing asset means an asset or account of
borrower ,which has been classified by bank or
financial institution as sub standard , doubtful or
loss asset, in accordance with the direction or
guidelines relating to assets classification issued
by RBI .
An amount due under any credit facility is
treated as past due when it is not been paid
within 30 days from the due date. Due to the
improvement in the payment and settlement
system, 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 shell be an
advance where
Interest and/or installment of principal remain
overdue for a period of more than 180 days in
respect of a term loan,
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The account remains outstanding (Out of Order) for
a period of more than 180 days in respect of an
overdraft/cash credit (OD/CC).
The bill remains overdue for a period of more than
180 days in case of bill purchased or discounted.
Interest and/or principal remains overdue for two
crop season but for a period not exceeding two half
years in case of an advance granted for agricultural
purpose, and
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 90 days overdue norms for
identification of NPAs, from the year ending
March 31, 2004, a non performing asset shell be a
loan or an advance where;
Out of order
An account should be treated as out of order if the
outstanding balance remains continuously in excess
of sanctioned limit /drawing power. in case where
the outstanding balance in the principal operating
account is less than the sanctioned amount
/drawing power, but there are no credits
continuously for six months as on the date of
balance sheet or credit are not enough to cover the
interest debited during the same period ,these
account should be treated as out of order.
Overdue
Any amount due to the bank under any credit
facility is overdue if it is not paid on due date
fixed by the bank.
(Details taken from RBI guidelines)
Impact of NPA:
Profitability:
NPA doesnt 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:
Neither principal amount nor interest amount is
being received to the banks against the assets. The
mobilisation of fund is stopped. It affects liquidity
of fund. It is difficulty in operating the functions.
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 days banks have special employees to deal
and handle NPAs, which is additional cost to the
bank.
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.
Regulatory measures have been taken to
strengthen the Indian Banking sectors
The important measures taken to strengthen the
banking sector are briefly, the following:
Introduction of capital adequacy standards on the
lines of the Basel norms,

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Prudential norms on asset classification, income
recognition and provisioning,
Introduction of valuation norms and capital for
market risk for investments
Enhancing transparency and disclosure
requirements for published accounts,
Aligning exposure norms single borrower and
group-borrower ceiling with inter-national best
practices
Introduction of off-site monitoring system and
strengthening of the supervisory framework for
banks.
LITERATURE REVIEW
Bhattacharya (2001) in his paper Banking
Strategy, Credit Appraisal & Lending decision
rightly points to the fact that in an increasing rate
regime, quality borrowers would switch over to
other avenues such as capital markets, internal
accruals for their requirement of funds. Under such
circumstances, banks would have no option but to
dilute the quality of borrowers thereby increasing
the probability of generation of NPAs.
Mohan (2003) conceptualized lazy banking
while critically reflecting on banks investment
portfolio and lending policy. The Indian viewpoint
alluding to the concepts of credit culture owing to
Reddy (2004) and lazy banking owing to Mohan
(2003) has an international perspective since
several studies in the banking literature agree that
banks lending policy is a major driver of non-
performing loans (McGoven, 1993). Furthermore,
in the context of NPAs on account of priority sector
lending, it was pointed out that the statistics may or
may not confirm this. There may be only a
marginal difference in the NPAs of banks lending
to priority sector and the banks lending to private
corporate sector. Against this background, the
study suggests that given the deficiencies in these
areas, it is imperative that banks need to be guided
by fairness based on economic and financial
decisions rather than system of conventions, if
reform has to serve the meaningful purpose.
Experience shows that policies of liberalisation,
deregulation and enabling environment of
comfortable liquidity at a reasonable price do not
automatically translate themselves into enhanced
credit flow. Although public sector banks have
recorded improvements in profitability, efficiency
(in terms of intermediation costs) and asset quality
in the 1990s, they continue to have higher interest
rate spreads but at the same time earn lower rates
of return, reflecting higher operating costs
(Mohan,2004).
Prashanth K Reddy (2002) in his work A
comparative study of Non Performing Assets in
India in the Global context - similarities and
dissimilarities, remedial measures by evaluated
the position of India with respect to other countries
in terms of NPA. This paper deals with the
experiences of other Asian countries in handling of
NPAs. It further looks into the effect of the reforms
on the level of NPAs and suggests mechanisms to
handle the problem by drawing on experiences
from other countries.
Santanu das (2007) in his work Management of
Non-Performing Assets in Indian Public Sector
Banks with special reference to Jharkhand had
taken a state specific research in the banking sector.
He rightly points to the fact that Expansion of
credit is a must for a country like India. But as
mentioned above, high credit growth may lead to
high NPAs. Policymakers, therefore, face the
dilemma as to how to minimize such risks that arise
from dilution in credit quality, while still allowing
bank lending to contribute to higher growth and
efficiency.
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Jigar j. Soni (2007) in his study of comparative
analysis of private and public sectors NPA
pointed out that there is a huge difference in the
public and private sector banks NPA and their
handling of the same. He also concluded that public
sector banks average NPA is lesser than the
average NPA of private sector banks. Jh
awar Ashok and Arya Maneesh Kant (2009)
discussed about the wage burden after a revision of
salary of bank employees and profitability of
banks. Arya Maneesh Kant and Sonwalkar J.
(2009), discussed the effect on profitability and
volatility of income with non interest income of
banks.
Sachin Nanda (2008) finds in his paper
Challenges of NPA to PSBs in India is that the
only problem that the Public Sector Banks are
facing today is the problem of nonperforming
assets. If the proper management of the NPAs is
not undertaken it would hamper the business of the
banks. The NPAs would destroy the current profit,
interest income due to large provisions of the
NPAs, and would affect the smooth functioning of
the recycling of the funds.
M. Karunakar, Mrs. K.Vasuki and Mr. S.
Saravanan in their research paper Are non -
Performing Assets Gloomy or Greedy from
Indian Perspective touched the ascpect such as
The problem of losses and lower profitability of
Non-Performing Assets (NPA) and liability
mismatch in banks and financial sector depend on
how various risks are managed in their business.
RESEARCH METHODOLOGY
The research is based on secondary data obtained
from RBI, IBA and some researchers have already
been done in the same fields. Data has been taken
for the period 2005-2009. The period is considered
for the research because of RBI issued new
guideline for management and administrates the
NPA. Ratios, growth, graphs and charts have been
used for analysis purpose.
Key Words:
NPA Non Performing Assets
NNPA- Net Non Performing Assets
NIM- Net Interest Margin
Capital Adequacy
RBI- Reserve Bank of India
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
%change in
5 years
Avg. growth of
5 years
Public Sector Bank 48405 42105 38968 40452 45156 -6.71 -1.34
Private Sector Bank 8546 7720 9255 12997 16863 97.32 19.46
Foreign Bank 2183 1919 2263 2872 6807 211.82 42.36
TOTAL 59134 51744 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
NPA/Net Advances ratio) was1.98% in 2004-05
.Of this the net NPAs to net advances ratio of the
Private Sector Banks was 2.3% closely followed by
Public Sector Bank sat 2.1% For Foreign Banks,
the ratio was much lower at 0.9%.
In the year 2008-08 situation was just reveres.
Public Sector banks group with 0.94%, Foreign
banks group 1.09% followed by Private Sector
banks group 1.21%.
There are many reasons to this change the most
important reason was Public and Private Sector
banks stepped up recovery efforts through
numerous methods. In addition to their own
internal recovery processes, banks recovered to the
tune of Rs 608 crore through one time settlement
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and compromise schemes, Rs 223 crore though
SARFAESI Act. Assets Reconstruction Company
of India Ltd. (ARCIL) acquired 559 cases
amounting to Rs 21126 crore from banks.
Conclusion and recommendations:
Banks are having Net Interest Margin (NIM)
between 3 to 5 percent any increase in NPA reduce
the profitability of banks. The banks which are
working in marginal difference may have loss.
Small banks are required to control NPA. There are
many small banks which have been merged in big
banks i.e. Lord Krishna, Centurion Bank, Bank of
Panjab etc. it is just because of question of
survivability in competitive environment.
Merger and acquisitions are good solutions for
giving strength to an organization but in this
process an organization/s lose their identity. There
are many mergers have been taken place in banking
industry in these changes one organization has to
change /lose its identity. This may be due to
continuous loss in the organization.
1. Strengthening provision norms and loan
classification standards based on forward looking
criteria (like future cash flows) were implemented.
2. Through securitization they can reduce NPA
3. Speed of action- the speedy containment of
systematic risk and the domestic credit crunch
problem with the injection of large public fund for
bank recapitalization are critical steps towards
normalizing the financial system.
4. Strengthening legal system by giving strict
guideline for credit analysis in terms of continuity
of income and earnings.
5. Maintain required capital adequacy ratio as per
Basel II norms. That means now the provision for
NPA will be more. This may look a conservative
approach. But it should be implemented to reduce
risk. ( Almost all banks achieved capital adequacy
norms till date.)
BIBLIOGRAPHY
BOOKS REFERRED:
Management of banking and financial services-
justin paul and padamlata suresh Banking and law
practices-gordan and natrajan
WEBSITES VISITED:
www.bioinfo.in/uploadfiles,ICICIdirect.com,ICICI.
com, valuenotes.com. Birlaa.com, RBI.org, Indian
Banks Association.Bloomberg.com
RESEARCH REPORTS- found with the help of
Google search engine.
Bhattacharya, H (2001), Banking Strategy, Credit
Appraisal & Lending Decisions, Oxford
University Press, New Delhi.
McGoven, J (1998): Why Bad Loans happen to
Good Banks, The Journal Of Commercial
Lending, Philadelphia, February 1998, Vol.78.
Mohan, R (2003): Transforming Indian Banking
In search of a better tomorrow, Reserve Bank of
India Bulletin, January
Reddy, Y.V (2004): Credit Policy, Systems and
Culture, RBI Bulletin, March
Sachin Nanda (2008) A report On NPA an d
Challenges to PSBs
Jigar J soni (2007) Comparative analysis of NPAs
of private and public sector banks
Prastanth K reddy (2002) comparative study of
Non Performing Assets in India in the Global
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BAUDDHIK VOLUME 4, NO.-3 SEPTEMBER- DECEMBER 2013 15
context - similarities and dissimilarities, remedial
measures, IIM Ahmadabad research journal
Shantanu das (2007)study of NPA w.r.t Jharakand
Bansal - 2012 Arecent trends in risk
management_1_8_JIOM.pdf
Sayuri Shirai; Assessment of Indian banking
sector reforms from the perspective of the
governance of the banking sector; (2001).ESCAP-
ADB Joint workshop on mobilizing domestic
finance for development BANGKOK 22-23 Nov
2001.
Balasubramaniam C.S.,Non Performing Assets
And Profitability Of Commercial Banks In India:
Assessment And Emerging Issues, national
monthly refereed journal of research in commerce
& management. volume no.1, issue no.7 ISSN
2277-1166.
ArticleM Allirajan & Aparna Ramalingam, TNN |
Aug 24, 2013, 01.40AM IST.
Bad debt and NPA: making sense of banking mess
Alam Srinivas | September 07 2013.