Effects of Non-Performing

Assets on the Indian

Economy
BUSINESS ECONOMICS

M.COM (Hons)
Arshpreet Kaur (7) & Navneet Kaur (17)
DR.TILAK RAJ
 CONTENTS
CHAPTER I: INTRODUCTION ........................................................................................................................................... 3
MEANING OF NON-PERFORMING ASSET .............................................................................................................. 5
TYPES OF NON-PERFORMING ASSETS .................................................................................................................. 6
CAUSES ................................................................................................................................................................................... 7
INTERNAL FACTORS .................................................................................................................................................. 7
EXTERNAL FACTORS.................................................................................................................................................. 8
HISTORICAL BACKGROUND...................................................................................................................................... 10
EXAMINING THE RISE OF NPAs IN INDIA...................................................................................................... 10
what is the extent and effects of npa problem in india? ...................................................................... 10
what led to the rise of npa? .................................................................................................................................. 11
what is being done to address the problem of growing npa? ........................................................... 11
CHAPTER II: RESEARCH METHODOLOGY .............................................................................................................. 13
NEED AND RELEVANCE ............................................................................................................................................... 13
DATA COLLECTION ........................................................................................................................................................ 13
OBJECTIVES ....................................................................................................................................................................... 13
CHAPTER III: FINDINGS AND ANALYSIS .................................................................................................................. 15
CURRENT SCENARIO ..................................................................................................................................................... 15
STATE BANK OF INDIA ........................................................................................................................................... 15
PUNJAB NATIONAL BANK ..................................................................................................................................... 15
CENTRAL BANK OF INDIA ..................................................................................................................................... 16
CANARA BANK ............................................................................................................................................................. 16
ICICI BANK ..................................................................................................................................................................... 16
TRENDS IN NPA ............................................................................................................................................................... 17
CHAPTER IV: CONCLUSION ............................................................................................................................................ 24
NPA MANAGEMENT STRATEGIES .......................................................................................................................... 24
REFERENCES AND BIBLIOGRAPHY ............................................................................................................................ 29
 CHAPTER I: INTRODUCTION
The banking industry has undergone a sea change after the first phase of economic liberalization
in 1991 and hence credit management came into picture.

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. 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. Non-performing assets had been the single largest cause of
irritation of the banking sector of India.

Earlier the Narasimha committee had broadly concluded that the main reason for the reduced
profitability of the commercial banks in India was given importance to priority sector lending.

The committee had highlighted that priority sector lending was leading to the building up of non-
performing assets of the banks and thus it recommended it to be phased out.

Therefore, while sanctioning credit the banker should appraise the project reasonably or else it
leads to the non-repayment of loans and advances.

Most of the banks today in India are facing the default risk wherein some part of the profit is
reserved for covering the non-performing assets.

NPA has its major impacts on Profitability, liquidity and credit loss of the bank.
 MEANING OF NON-PERFORMING ASSET
Reserve Bank of India (RBI) defines NPA as: “An asset, including a leased asset, becomes non-
performing when it ceases to generate income for the bank. A “Non-performing asset” (NPA) is
defined as a credit facility in respect of which the interest and/or installment of principal has
remained „past due‟ for a specified period of time (90 days, March 31, 2004 onwards).

Earlier assets were declared as NPA after the completion of the period for the payment of the
total amount of loan and 30 days grace.

In present scenario, assets are declared as NPA if none of the installment is paid till 180 days i.e.
6 months in respect of a term loan.

With effect from March 31, 2004, a non performing asset shall be loan or an advance where;

 Interest and/or instalment of principal remain overdue for a period of more than 90 days
in respect of a term loan.
 The account remains out of order for a period of more than 90 days, in respect of an
overdraft/cash credit(od/cc)
 The bill remains overdue for a period of more than 90 days in the case of bills purchased
and discounted,

The term non-performing asset has been defined by several experts, SARFAESI Act and RBI on
the basis of recommendation of Narasimham Committee.

 Mohan, B. and Rajesh, K. defined

“A non-performing asset is one which does not generate income for the bank. In other words, an
advance account which ceases to yield income in a non-performing asset.”

 Lakshman, U.N defined

NPA - “an advance where payment of interest or repayment of installment on principal (in case
of term loans) or both remain unpaid for a period of 2 quarters or more and if they have become
“past due”. An amount under any of the credit facilities is to be treated as past due when it
remains unpaid for 30 days beyond due date”.

 Reddy, C.S. and Kalavathi, V. defined

NPA- “an asset which ceases to yield income for the bank and that any income accrued from
such asset shall not be treated as income”.
 TYPES OF NON-PERFORMING ASSETS

SUBSTANDARD ASSETS

NON PERFORMING ASSETS DOUBTFUL ASSETS

LOSS ASSETS

For the evaluation of bank performance, it is important to identify the quality of assets of the
bank. In the light of Narasimha Committee recommendations, the Reserve Bank of India has
redefined the non-performing assets and advised all commercial banks in public sector, old and
new private sector banks, development banks and the co- operative banks, to classify their
advances into four broad categories i.e. Standard, Sub- standard, Doubtful and Loss assets. The
standard assets are treated as performing assets and the remaining three categories are treated as
non-performing assets.

1. Substandard Assets:
With effect from 31 March 2005, a substandard asset would be one, which has remained
NPA for a period less than or equal to 12 months. In such cases, the current net worth of
the borrower/ guarantor or the current market value of the security charged is not enough
to ensure recovery of the dues to the banks in full. In other words, such an asset will have
well defined credit weaknesses that jeopardize the liquidation of the debt and are
characterized by the distinct possibility that the banks will sustain some loss, if
deficiencies are not corrected.
2. Doubtful Assets:

With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in
the substandard category for a period of 12 months. A loan classified as doubtful has all the
weaknesses inherent in assets that were classified as sub-standard, with the added characteristic
that the weaknesses make collection or liquidation in full, – on the basis of currently known
facts, conditions and values – 12 highly questionable and improbable.

3. Loss Assets:

A loss asset is one where loss has been identified by the bank or internal or external auditors or
the RBI inspection but the amount has not been written off wholly. In other words, such an asset
is considered uncollectible and of such little value that its continuance as a bankable asset is not
warranted although there may be some salvage or recovery value.

4. GROSS NPAS

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 NPAs reflects the quality of the loans made by the banks . it consist of all the non-standard
assets like sub-standard, doubtful and loss assets.

GROSS NPAs=GROSS NPAS

GROSS ADVANCES

5. NET NPAS

Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs.
Net NPAs shows the actual burden of banks.

NET NPAS =GROSS NPAS - PROVISION

GROSS ADVANCES

CAUSES
There are many causes of non-performing assets which can be classified into internal as well a
external factors as discussed below:-

INTERNAL FACTORS

1. INEFFECTIVE UTILISATION

Funds borrowed for particular purpose are not utilized for the same.

2. DEFECTIVE LENDING PROCESS:

There are three principles that are followed by the commercial banks in lending process i.e.
principle of safety, principle of liquidity, principles of profitability.

Principle of safety means that the borrower is in position to pay back the loan. Therefore, the
banker should take utmost care in ensuring that the enterprise or business for which a loan is
sought is a sound one and the borrower is competent of carrying it out successfully, he should be
a person of integrity and good character.

3. INAPPROPRIATE TECHNOLOGY:
Due to improper technology and management information system, market driven decisions on
real time basis cannot be taken. So, all the branches of banks should be upgraded with current
technology.

4. IMPROPER SWOT ANALYSIS:

The inappropriate strength, weakness, opportunity and threat analysis is another reason for
increase in NPA’s. So, the bank should examine the profitability, viability, long term
acceptability of the project while financing.

5. POOR CREDIT APPRAISAL SYSTEM:

Due to poor credit appraisal the bank gives advances to those who are not able to repay it back.
As a result, the NPA’s of the bank increases. So, the bank should maintain proper credit
appraisal system.

6. MANAGERIAL DEFICIENCIES:

The banker should always select the borrower very cautiously and should take tangible assets as
security to safeguard its interests. The banker should follow the principle of diversification of
risks which means that the banker should not grant advances to a few big firms only or to
concentrate them in few industries or in few cities.

7. ABSENCE OF REGULAR FOLLOW UP:

The irregularities in spot visit also increase the NPA’s; the absence of regular visit of bank
officials to the customer point decreases the collection of interest and principal on the loan.

8. INCOMPLETE AND FAULTY DOCUMENTATION:

Most of the times there is incomplete and faulty documentation which leads to non-payment of
the loan.

There should thorough verification by the officials on the documents submitted by the borrowers.

EXTERNAL FACTORS

1. INEFFECTIVE RECOVERY TRIBUNAL:

The government has set of number of recovery tribunals, which works for recovery of loans and
advances, due to their carelessness and ineffectiveness in their work the bank suffers the
consequence of non-recovery, thereby reducing their profitability and liquidity.

2. WILLFUL DEFAULTS: -

The Indian Public Sector Banks are worst hit by these defaults. It is a default in repayment
obligation. Ex: Kingfisher Airlines Ltd. Is one among many of those willful defaulters. Others
are Beta, Napthol, Winsome Diamonds & Jewellery Ltd., Rank Industries Ltd., XL Energy Ltd.
etc.
3. NATURAL CALAMITIES:

This is the measure factor, which is creating alarming increase in NPA’s of the PSBs. Basically,
our farmers depend on rainfall for cropping due to irregularities of rainfall the farmers are unable
to attain the production level and thus they are unable to repay the loans. So, the banks has to
make large amount of provisions in order to pay those loans

4. INDUSTRIAL SICKNESS:

Inappropriate project handling, ineffective management, lack of adequate resources, lack of

advanced technology, day to day change in government policies produce industrial sickness
therefore the banks that finance those industries end up with a low recovery of their loans, by
reducing their profit and liquidity.

5. LACK OF DEMAND:

Entrepreneurs in India could not predict 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. Therefore, the banks record the non-recovered part as NPA’s and has
to make provision for it.
 HISTORICAL BACKGROUND

EXAMINING THE RISE OF NPAS IN INDIA

The issue of Non-Performing Assets (NPAs) in the Indian banking sector has become the subject
of much discussion and scrutiny. The Standing Committee on Finance recently released a report
on the banking sector in India, where it observed that banks’ capacity to lend has been severely
affected because of mounting NPAs. The Estimates Committee of Lok Sabha is also currently
examining the performance of public sector banks with respect to their burgeoning problem of
NPAs, and loan recovery mechanisms available.
Additionally, guidelines for banks released by the Reserve Bank of India (RBI) in February 2018
regarding timely resolution of stressed assets have come under scrutiny, with multiple cases
being filed in courts against the same. In this context, we examine the recent rise of NPAs in the
country, some of their underlying causes, and steps taken so far to address the issue.

WHAT IS THE EXTENT AND EFFECTS OF NPA PROBLEM IN INDIA?

Banks give loans and advances to borrowers. Based on the performance of the loan, it may be
categorized as:
(I) A standard asset (a loan where the borrower is making regular repayments), or
(II) A non-performing asset.
NPAs are loans and advances where the borrower has stopped making interest or principal
repayments for over 90 days.
As of March 31, 2018, provisional estimates suggest that the total volume of gross NPAs in the
economy stands at Rs 10.35 lakh crore. About 85% of these NPAs are from loans and advances
of public sector banks. For instance, NPAs in the State Bank of India are worth Rs 2.23 lakh
crore.
In the last few years, gross NPAs of banks (as a percentage of total loans) have increased from
2.3% of total loans in 2008 to 9.3% in 2017 (Figure 1). This indicates that an increasing
proportion of a bank’s assets have ceased to generate income for the bank, lowering the bank’s
profitability and its ability to grant further credit.
Escalating NPAs require a bank to make higher provisions for losses in their books. The banks
set aside more funds to pay for anticipated future losses; and this, along with several structural
issues, leads to low profitability. Profitability of a bank is measured by its Return on Assets
(ROA), which is the ratio of the bank’s net profits to its net assets. Banks have witnessed a
decline in their profitability in the last few years (Figure 2), making them vulnerable to adverse
economic shocks and consequently putting consumer deposits at risk.
 WHAT LED TO THE RISE OF NPA?

Some of the factors leading to the increased occurrence of NPAs are external, such as decreases
in global commodity prices leading to slower exports. Some are more intrinsic to the Indian
banking sector.
A lot of the loans currently classified as NPAs originated in the mid-2000s, at a time when the
economy was booming and business outlook was very positive. Large corporations were granted
loans for projects based on extrapolation of their recent growth and performance. With loans
being available more easily than before, corporations grew highly leveraged, implying that most
financing was through external borrowings rather than internal promoter equity. But as economic
growth stagnated following the global financial crisis of 2008, the repayment capability of these
corporations decreased. This contributed to what is now known as India’s Twin Balance Sheet
problem, where both the banking sector (that gives loans) and the corporate sector (that takes and
has to repay these loans) have come under financial stress.
When the project for which the loan was taken started underperforming, borrowers lost their
capability of paying back the bank. The banks at this time took to the practice of ‘ever greening’,
where fresh loans were given to some promoters to enable them to pay off their interest. This
effectively pushed the recognition of these loans as non-performing to a later date, but
did not address the root causes of their unprofitability.
Further, recently there have also been frauds of high magnitude that have contributed to rising
NPAs. Although the size of frauds relative to the total volume of NPAs is relatively small, these
frauds have been increasing, and there have been no instances of high profile fraudsters being
penalised.

WHAT IS BEING DONE TO ADDRESS THE PROBLEM OF GROWING NPA?

The measures taken to resolve and prevent NPAs can broadly be classified into two kinds – first,
regulatory means of resolving NPAs per various laws (like the Insolvency and Bankruptcy
Code), and second, remedial measures for banks prescribed and regulated by the RBI for internal
restructuring of stressed assets.
The Insolvency and Bankruptcy Code (IBC) was enacted in May 2016 to provide a time-bound
180-day recovery process for insolvent accounts (where the borrowers are unable to pay their
dues). Under the IBC, the creditors of these insolvent accounts, presided over by an insolvency
professional, decide whether to restructure the loan, or to sell the defaulter’s assets to recover the
outstanding amount. If a timely decision is not arrived at, the defaulter’s assets are liquidated.
Proceedings under the IBC are adjudicated by the Debt Recovery Tribunal for personal
insolvencies, and the National Company Law Tribunal (NCLT) for corporate insolvencies. 701
cases have been registered and 176 cases have been resolved as of March 2018 under the IBC.
 CHAPTER II: RESEARCH METHODOLOGY

NEED AND RELEVANCE

NPAs adversely affect lending activity of banks as non-recovery of loan installment as also
interest on the loan portfolio negates the effectiveness of credit dispensation process. Non-
recovery of loans also hurts the profitability of banks. Besides, banks with high level of NPAs
have to carry more owned funds by way of capital and create reserves and provisions and to
provide cushion for the loan losses. NPAs, thus, make two-pronged attack on the bottom-lines of
commercial banks; one, interest applied on such assets is not taken into account because such
interest is to be taken, into account only on its realization unlike interest on performing assets
which is taken into account on accrual basis; two, banks have to make provisions on NPAs from
out of the income earned by them on performing assets. Persistently high level of NPAs in loan
portfolio of banks makes them fragile, leading ultimately to their failure. This will shake the
confidence both of domestic and global investors in the banking system which will have
multiplier effect, bringing disaster in the economy. Thus, the most critical condition for bringing
about an improvement in the profitability of banks is reduction in the level of NPAs. In fact, it is
a pre-condition for the stability of the financial system. The NPA concept presently in vogue was
introduced by RBI for implementing in the banks, in the year 1993 based on the
recommendations of the committee on the financial system in line with internationally accepted
norms. Thus due to these reasons the need to study the NPA’s arises.

DATA COLLECTION
Secondary data has been used for the research.

OBJECTIVES
 To study about the NON-Performing Assets
 To know about the impact of non-performing assets on the Indian Economy
 To study the trends of NPAs
 To know how NPAs can be managed
 CHAPTER III: FINDINGS AND ANALYSIS

CURRENT SCENARIO

The current situation of non-performing assets is different in different banks. The situation of
different banks is discussed below: -

STATE
CANARA
BANK OF
BANK
INDIA

PUNJAB CENTRAL
NATIONAL BANK OF
BANK INDIA

STATE BANK OF INDIA

State Bank of India (SBI), was back in the black and reported a net profit of Rs 2,312 crore for
the June quarter of 2019-20 (Q1FY20) on the back of healthy growth in advances and stable
asset quality. The bank had reported a net loss of Rs 4,875.9 crore in the corresponding quarter
of the previous fiscal (Q1FY19) and a PAT of Rs 838.4 in the March 2019 quarter (Q4FY19).

The profit beat analysts’ expectations who had pegged the profit at Rs 2,066.7 crore.

The bank’s asset quality improved with gross non-performing assets (GNPA) at Rs 1.68 lakh
crore, down 21 per cent, from Rs 2.13 lakh crore reported in Q1FY19. It was down 2.8 per cent
sequentially from Rs 1.73 lakh crore in Q4FY19.The net NPA (NNPA) remained flat on a
quarterly basis.

PUNJAB NATIONAL BANK

Punjab National Bank (PNB) recently said that its fresh NPAs have been coming down as it
continues to reinforce internal processes to deal with the situation better. A top PNB official said
it has already provisioned close to Rs 14,000 crore towards fugitive diamantine Nirav Modi's
alleged fraud on its books and all recoveries will only add to its profit.

"The fresh slippages are coming down," PNB managing director and CEO Sunil Mehta said here
without elaborating. He was speaking to reporters at the inauguration of a central loan processing
centre (CLPC) in the city which is part of its futuristic initiative called Mission Parivartan. As of
September 2018, PNB's gross non performing asset (NPA) was around Rs 80,000 crore. Officials
said they have provisioned around Rs 14,000 crore, which was up from earlier estimates for the
alleged Nirav Modi induced fraud.

The bank recently recovered Rs 60 crore from disposing some of Modi's assets in the US, they
said. Meanwhile, the officials said that PNB's CLP centers aim to strengthen the bank's internal
credit offering systems and processes. These are specialised loan processing centers for loans
ranging from Rs 50 lakh to Rs 50 crore. The new centre will reduce the turnaround time for
lending, improve decision making and bring transparency in the lending process, the bank said.

CENTRAL BANK OF INDIA

Public sector lender Central Bank of India NSE -0.29 % Wednesday reported widening in its
losses to Rs 2,477.41 crore in the last quarter of 2018-19 due to a spike in provisioning of bad
loans.

The bank had reported a loss of Rs 2,113.51 crore in the January-March period of 2017-18. The
bank had reported a loss of Rs 718.23 crore for the third quarter ended December 2018.

According to the report,

Gross non-performing assets stood at 19.29 per cent of gross advances at end-March 2019,
against 21.48 per cent in the year-ago period. Net NPAs or bad loans stood at 7.73 per cent from
11.10 per cent a year ago.

CANARA BANK

State-owned Canara bank recently reported a 17.08 % rise in its standalone net profit to Rs
329.07 crore for the first quarter ended June 30, mainly driven by reduction in bad loans.

The bank had registered a net profit of Rs 281.49 crore in the April-June period of 2018-19.

Total income rose to Rs 14,062.39 crore in the June quarter from Rs 13,192.46 crore in same
period a year ago, Canara Bank said in a regulatory filing.

ICICI BANK

ICICI BANK recently reported: -

Lowest net NPA ratio in 14 quarters
The bank said its net non-performing assets (NPA) fell 51% for the quarter to Rs 11,857 crore at
the end of June quarter from Rs 24,170 crore at the end of year-ago quarter.

Net NPA for the quarter fell to 1.77 per cent, the lowest in the last 14 quarters. The net NPA for
the bank stood at 4.19 per cent in the year-ago quarter.

In gross terms, NPA fell NPA were Rs 2,779 crore compared with Rs 4,036 crore in the year-ago
quarter and Rs 3,547 crore in March quarter.

Gross non-performing assets (NPA) for the quarter eases to 6.49 per cent from 6%in March
quarter and 8.81 per cent in the year-ago quarter.
So, in overall, we can say that NPAs are reducing in the current scenario as compared to the
previous year’s data.

TRENDS IN NPA

The trends in gross NPAs to gross advances of commercial banks can be analyzed for three time
periods: (i) 1996–97 to 2000–01; (ii) 2001–02 to 2007–08; and (iii) 2008–09 to 2017–18. Table 1
provides these details. It may be observed from Table 1 that the share of NPAs to total advances
was relatively high in the 1990s, possibly because there was no back-up of legislative measures
for recovery of loans. The share was even higher at 20% for some of the years in the early phase
of the reform period.

The second phase was characterised by the setting up of Debt Recovery Tribunals, enactment of
the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest
(SARFAESI) Act, and the establishment of Asset Reconstruction Companies (ARC) to off Load
bad loans at a discount.

In the third phase, the strategy for restructuring of corporate debt was undertaken. Thus, it is
interesting to note that the share of NPAs in gross advances declined over different time periods.

Table 1: Average NPAs to Gross Advances (%)

Period NPAs as % GA
1996-97 to 2000-01 12.8
2001-02 to 2007-08 5.7
2008-09 to 2017-18 5.1

Table 2: Stressed Assets of Commercial Banks

Year GNPA/GA (1) RA/GA (2) TSA/GA (3)

2008-09 2.3 3.2 5.5
2009-10 2.4 4.3 6.7
2010-11 2.5 3.5 6.0
2011-12 3.1 4.7 7.8
2012-13 3.2 5.7 9.1
2013-14 3.8 5.7 9.8
2014-15 4.3 6.4 11.1
2015-16 7.6 3.9 11.5
2016-17 9.6 2.4 12.0
2017-18 11.6 13.2 24.8
GNPA/GA: Gross Non-Performing Assets to Gross Advances
RA/GA: Restructured Assets to Gross Advances
TSA/GA: Total Stressed Advances to Gross Advances
Although measures for recovery of bad loans were also enforced in the third phase, the CDR
scheme implemented during this phase mitigated the declining trend, in view of the conversion
of some substandard loans to the standard category for the companies deemed viable. These
loans could be effectively regarded as a threat to the profits of commercial banks, if the
performance does not lead to expected returns. Such restructured loans should be considered as
stressed assets along with other NPAs. Table 2 provides the details, by supplementing the data
on restructured assets. It can be observed from Table 2 that when the restructured loans are taken
into account, the share of total stressed assets to advances increased gradually from 5.5% in
2008–09 to 24.8% in 2017–18.5.The recent trends in key financial variables which have borne
the impacts of NPAs can be examined in Table 3.

Table 3: Key Financial Ratios

Year 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Return on 1.1 1.0 0.8 0.8 0.4 0.4
assets
Return on 14.6 13.8 10.7 10.4 3.6 4.2
equity
Provisioning 52.5 47.6 44.7 44.2 41.9 43.5
Ratio
CRAR 13.0 13.9 13.0 12.9 13.3 13.6
The data reveal that profitability ratios, which hovered over 1% in each of the years, declined
overtime, albeit slightly with reference to assets. Group wise disaggregation of banks indicated
that public sector banks incurred losses, with the ratio being negative in the last two years. But
with reference to equity, there had been a steep fall from 14.6% in 2011–12 to 4.2% in 2016–17.
Provisioning ratio declined from 52.5% to 43.5% in the years under reference, although the
stressed ratio showed an increase. The CRAR remained broadly stable in the range of 13%–14%
in each of the years, with commercial banks maintaining a higher ratio than that stipulated by
Basel norms. An analysis of NPAs of priority sectors versus non-priority sectors of commercial
banks revealed that the share of NPAs of priority sectors has been declining in recent years (from
46.9% in 2011–12 to 23.3% in 2016–17), while that of the non-priority sectors was increasing
(from 53.1% in 2011–12 to 76.7% in 2016–17). Thus, currently three-fourth of the NPAs
pertains to the non-priority sector, partly reflecting the stressed advances also (Table 4).

DEBT PROFILE AND LEVERAGED RATIOS:

Although a slight digression in the context of the CDR scheme, it would be relevant to touch
upon the pattern of credit/debt of the PCS, as reflected in the studies on banking statistics and the
company finances of the RBI, and also the shifts thereof in recent years. It may be observed from
Table 5 that the share of bank credit to PCS declined over the years, from 37.7% in 2010–11 to
32.3% in 2016–17. The studies on company finances also revealed the same trends: the share of
bank borrowings in total borrowings declined from 60.8% in 2010–11 to 53.6% in 2015–16. In a
milieu of rationing of credit by the commercial banks to the PCS, the companies resort to
borrowings from other financial institutions and also from the rest of the world (external
commercial borrowings).6 Thus, even though the share of bank borrowings of PCS declined over
the years, the NPAs associated with them need careful scrutiny. The RBI studies on company
finances provide further interesting tabulations of bank borrowings to total borrowings classified
by leverage (debt–equity) ratios. Table 6 provides these details. Considering the top strata of
companies with debt–equity ratio greater than four, the share of bank borrowings hovered in the
range of 60%–70% from 2012–13 to 2014–15, but declined steeply to 46.1% in 2015–16. It is
also observed that, even in respect of companies with a negative net worth, the share of bank
borrowings was significant, ranging from 40%–50%. Even so, the companies with high debt–
equity ratios and negative net worth need to be monitored from the point of view of restructured
advances. As per the data released by the RBI under Central Repository Information on Large
Credits (CRILC), the share of NPAs of large borrowers in total advances was as high as 86% at
the end of March 2016 (Financial Stability Report 2016).

Table 5: Share of Bank Credit to PCS

Year BSR Share of Bank Share of bank

Credit to PCS-Large Borrowings in Total
Borrowal Accounts (1) Borrowings from
Company Finance
Studies (2)
2010-11 37.7 60.8
2011-12 35.9 60.4
2012-13 34.7 56.6
2013-14 35.4 57.7
2014-15 34.3 55.5
2015-16 33.2 53.6
2016-17 32.3 Not Available
Source: Data under column (1) are derived from the RBI annual publication, namely, Basic
Statistical Returns of Scheduled Commercial Banks. The large borrowal accounts therein
are those accounts, each with a credit limit more than `2 lakh. The tabulation of bank credit
by type of organisation presented in BSR covers the PCS under two categories: financial
companies and non-financial companies. Only the latter category is considered in the above
calculations. Data in column (2): “Finances of Non-government Non-financial Public
Limited Companies,” various issues of the RBI Bulletin.

Table 6: Share of Bank Borrowings in Total Borrowings of Companies

Leverage Class 2012-13 2013-14 2014-15 2015-16
0-100 56.1 57.5 53.0 58.2
100-200 63.2 60.3 59.1 45.7
200-300 60.0 64.3 61.3 61.6
300-400 60.1 52.4 60.1 58.3
Above 400 66.0 61.8 63.4 46.1
Net worth 43.9 44.7 44.7 48.3
negative
Total 56.6 57.7 55.5 53.6
 IMPACT OF NPA ON BANKING INDUSTRY

Today, the Indian banking industry is dealing with the mammoth amount of NPAs which is fifth
largest in the world. As on June 30, 2018, the gross NPAs of the banking sector were 11.52% of
the total assets while the net NPAs were 5.92%. As on March 31, 2018, the gross NPAs were at
11.68% and net NPAs were 6.21%. Thus, there is slight improvement in NPAs this year.

The increasing NPAs not only reduce the profitability of banks but also affect its credibility. In
fact, the massive amount of NPAs with commercial banks is threatening to erode half of the
capital base of public sector banks.

Once a bank started incurring losses and if the fundamentals are not corrected, the problem may
become chronic and destabilize the confidence of the depositors. Once the depositors start
withdrawing their money from the banks, the banking system will collapse. It is because of this
reason that NPAs must always remain within the sustainable limit and the current level of NPAs
is threatening the stability.

Higher amount of NPAs also pressurise banks to decrease the interest rate on saving deposits to
increase the margin. Already there is a gap between interest rate on bank savings vis-a-vis
savings in other non-banking accounts like PPF, post office saving schemes etc. Further, several
mutual funds are providing returns of more than 10%. Further diversion in interest rates will
divert the funds from banking sector to non-banking sector further eroding the capital with
banks.

Thus, the increasing NPAs pose long-term threats to the stability of banking sector.

High Non-Performing Assets are the foremost problem for the banking system for any economy,
that shakes the whole banking system of the country.

SO, the impact of non- performing assets on banking sector can be studied in the following
details :-

1. IMPACT ON PROFITABILITY

Non-Performing Assets not only reduces the profit of the Bank but also increases the Loss.

Also, banks also providing 25 % to 30% additional provision on Non-Performing Assets which
directly impact the Profitability of the Bank.

2. LIABILITY MANAGEMENT

Due to high Non-Performing Assets, Bank for forced for lower the interest rates of the deposit
and on advances likely to pay Higher interest rates on advances.

This situation is a very difficult situation and also hamper the banking business.

3. SHARE HOLDERS CONFIDENCE

Not in the Banking sector, but shareholders need their money in safe hands, Shareholders are
interested in the enhancement of investment and market capitalization.

High Non-Performing Assets reduces the confidence level of the investor which significantly
impact the Share price of the Bank in this situation, banks stop payout of dividend to the
shareholders, which was not in the interest of the investor.

4. PUBLIC CONFIDENCE

The poor performance of the Bank due to increases in Non-Performing Assets not only lower the
sentiments of the investor but the bank also loses the faith of Public, this directly affects the
deposits into the bank.

5. HIGHER COST OF CAPITAL

It shall result in increasing the cost of capital as banks will now have to keep aside more funds
for smooth operations.

6. UNDERMINE BANK’S IMAGE

Increase in non-performing assets which shadows the domestic markets and global level markets,
on that situation the bank profitability decreases which lead to the bad image to banks.

SOME CASES

KINGFISHER AIRLINES- VIJAY MALLAYA

Launching Of Kingfisher Airlines:

Everything was eventually overshadowed by Mallya’s entry into aviation in 2005. Kingfisher
Airlines, launched on Mallya’s son Siddharth Mallya’s 18th birthday, was marketed as India’s
only world-class, premium airline. For a while, things seemed fine and Kingfisher quickly
became the No. 2 airline in India by market share.

In 2007 Kingfisher airline is doing well and highly enthusiastic Malaya decide to acquire bank
corrupt Air Deccan.

Air Deccan deal is signed and sealed. United Breweries Limited pays Rs 550 crore for a 26 per
cent stake in the carrier. Arguably a wrong move that possibly led to the downfall of United
Breweries Limited.

The global financial crisis struck. Kingfisher survived the first few years of the crisis, but
eventually the financial pressure started showing.

Kingfisher Airlines owes a debt of Rs. 934 crores due to:

 A heightened spike in oil prices.

  Economic Recession of 2008.

As a consequence of this:

 The airline had to cut its fleet to 28 planes from 66 owing to a resulting cash crunch.

 Kingfisher airline is not able to pay salary to its employees.

 Mallya hoped to get a foreign airline to invest in Kingfisher after the Indian government
allowed foreign direct investment (FDI) in airlines in September 2012.

 But Kingfisher, which had never made a profit, never flew again.

 The Directorate General of Civil Aviation (DGCA) has suspended the air operating
license of Vijay Mallya- controlled Kingfisher Airlines Ltd till further orders.

 The liquor baron Vijay Mallya made a settlement with Diageo. It was a deal that release
him from claims of mismanaging United Spirits and also gave him a one-time settlement
of $75 million.

 Diageo completed the purchase of a majority stake (54.7%) in United Spirits in July
2014.

 Malaya's resignation comes at a time when State Bank of India and Punjab National
Bank have declared him a willful defaulter because of his inability to pay dues to as many
as 17 banks, amounting to Rs.7,000 crores.
 CHAPTER IV: CONCLUSION
Therefore, it can be concluded that the non-performing assets are reducing to some extent due to
management but they also have an impact on the Indian Economy and banking system. Various
steps have been taken by the government along with RBI to recover and reduce NPAs including
the preventive and curative strategies. Also, the banks have been following strict norms and
procedures while giving loans to ensure that enough security has been possessed for the loan and
that the amount of the security is much more than the loan granted. Also, the banks are doing
regular checks on their loans granted and securities pledged. The various strategies by the
authourities are given below:

NPA MANAGEMENT STRATEGIES

NPA
MANAGEMENT
STRATEGIES

PREVENTIVE CURATIVE
MANAGEMENT MANAGEMENT

Various steps have been taken by the government and RBI to recover and reduce NPAs. These
strategies are necessary to control NPAs.

1. Preventive management, and

2. Curative management

A. Preventive Management: Preventive measures are to prevent the asset from becoming a non
performing asset. Banks has to concentrate on the following to minimize the level of NPAs.

1. Early Warning Signals- The origin of the flourishing NPAs lies in the quality of managing
credit assessment, risk management by the banks concerned. Banks should have adequate
preventive measures, fixing presanctioning appraisal responsibility and having an effective post-
disbursement supervision. Banks should continuously monitor loans to identify accounts that
have potential to become non-performing. It is important in any early warning system, to be
sensitive to signals of credit deterioration. A host of early warning signals are used by different
banks for identification of potential NPAs. Most banks in India have laid down a series of
operational, financial, transactional indicators that could serve to identify emerging problems in
credit exposures at an early stage. Further, it is revealed that the indicators which may trigger
early warning system depend not only on default in payment of installment and interest but also
other factors such as deterioration in operating and financial performance of the borrower,
weakening industry characteristics, regulatory changes, and general economic conditions.

Early warning signals can be classified into five broad categories viz.

(a) Financial

(b) Operational

(c) Banking

(d) Management, and

(e) External factors.

Financial related warning signals generally emanate from the borrowers’ balance sheet, income
expenditure statement, statement of cash flows, statement of receivables etc. Following common
warning signals are captured by some of the banks having relatively developed EWS.

2. Financial warning signals

• Persistent irregularity in the account

• Default in repayment obligation

• Devolvement of LC/invocation of guarantees

• Deterioration in liquidity/working capital position

• Substantial increase in long term debts in relation to equity

• Declining sales

• Operating losses/net losses

• Rising sales and falling profits

• Disproportionate increase in overheads relative to sales

• Rising level of bad debt losses Operational warning signals

• Low activity level in plant

• Disorderly diversification/frequent changes in plan

• Nonpayment of wages/power bills

• Loss of critical customer/s

• Frequent labor problems

• Evidence of aged inventory/large level of inventory

3. Management related warning signals

• Lack of co-operation from key personnel

• Change in management, ownership, or key personnel

• Desire to take undue risks

• Family disputes

• Poor financial controls

• Fudging of financial statements

• Diversion of funds

4. Banking related signals

• Declining bank balances/declining operations in the account

• Opening of account with other bank

• Return of outward bills/dishonored cheques

• Sales transactions not routed through the account

• Frequent requests for loan

• Frequent delays in submitting stock statements, financial data, etc. Signals relating to external
factors

• Economic recession

• Emergence of new competition

• Emergence of new technology

• Changes in government / regulatory policies

• Natural calamities

5. 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. Most of the banks have a system to put certain borrowable accounts
under watch list or special mention category if performing advances operating under adverse
business or economic conditions are exhibiting certain distress signals. These accounts generally
exhibit weaknesses which are correctable but warrant banks’ closer attention. The categorization of
such accounts in watch list or special mention category provides early warning signals enabling
Relationship Manager or Credit Officer to anticipate credit deterioration and take necessary
preventive steps to avoid their slippage into non performing advances

6. Willful Defaulters: RBI has issued revised guidelines in respect of detection of willful default
and diversion and siphoning of funds. As per these guidelines a willful default occurs when a
borrower defaults in meeting its obligations to the lender when it has capacity to honor the
obligations or when funds have been utilized for purposes other than those for which finance was
granted. The list of willful defaulters is required to be submitted to SEBI and RBI to prevent their
access to capital markets. Sharing of information of this nature helps banks in their due diligence
exercise and helps in avoiding financing unscrupulous elements. RBI has advised lenders to initiate
legal measures including criminal actions, wherever required, and undertake a proactive approach
in change in management, where appropriate.

B. Curative Management: The curative measures are designed to maximize recoveries so that
banks funds locked up in NPAs are released for recycling. The Central government and RBI have
taken steps for controlling incidence of fresh NPAs and creating legal and regulatory environment
to facilitate the recovery of existing NPAs of banks. They are:

1. One Time Settlement Schemes- This scheme covers all sectors sub – standard assets, doubtful
or loss assets as on 31st March 2000. 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. Lok Adalats- Lok Adalat institutions help banks to settle disputes involving account in “doubtful”
and “loss” category, with outstanding balance of Rs. 5 lakh for compromise settlement under Lok
Adalat. Debt recovery tribunals have been empowered to organize Lok Adalat to decide on cases of
NPAs of Rs. 10 lakh and above. This mechanism has proved to be quite effective for speedy justice
and recovery of small loans. The progress through this channel is expected to pick up in the coming
years.

3. Debt Recovery Tribunals (DRTs): The Debt Recovery Tribunals have been established by the
Government of India under an Act of Parliament (Act 51 of 1993) for expeditious adjudication and
recovery of debts due to banks and financial institutions. The Debt Recovery Tribunal is also the
appellate authority for appeals filed against the proceedings initiated by secured creditors under
the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act.

4. Securitization and SARFAESI Act: Securitization is a relatively new concept that is taking roots
in India of late. It is still in its infancy with only a few market players. Securitization is considered an
effective tool for improvement of capital adequacy. It is also seen as a tool for transferring the
reinvestment risk, apart from credit risk helping the banks to maintain proper match between
assets and liabilities. Securitization can also help in reducing the risk arising out of credit exposure
norms and the imbalances of credit exposure, which can help in the maintenance of healthy assets.
The SARFAESI Act intends to promote Securitization, pool together NPAs of banks to realize them
and make enforcement of Security Interest Transfer.

The SARFAESI Act-2002 is seen as a booster, initially, for banks in tackling the menace of NPAs
without having to approach the courts. With certain loopholes still remaining in the act, the
experiences of banks were that the Act in its present form would not serve the envisaged objective
of optimum recovery of NPAs, particularly with the hard-core NPA borrowers dragging the banks
into endless litigation to delay the recovery process. The Supreme Court decision in regard to
certain proviso of the SARFAESI Act also vindicated this view. This section deals with the features of
Securitization and its resourcefulness in tackling NPAS and about the SARFAESI Act, its
resourcefulness and limitations in tackling the NPA borrowers and the implication of the recent
Supreme Court judgment.

With the steady sophistication of the Indian Financial Services Sector, the structured finance
market is also growing significantly, of which Securitization occupies a prominent place. With Basel
II norms imminently being implemented by 2008, banks are required to pool up huge capital to
offset the credit risk and operational risk components. Securitization, therefore, is seen to be an
effective and vibrant tool for capital formation for banks in future.
 REFERENCES AND BIBLIOGRAPHY
 www.hindu.com
 A Comparative study of Non Performing Assets in Public and Private Sector Banks in the
New Age of Technology SatpalA * ȦDepartment of Management Studies, Deenbandhu
Chhotu Ram University of Science and Technology, Murthal (Sonepat), India Accepted 15
July 2014, Available online 01 Aug 2014, Vol.4, No.4 (Aug 2014)
 Non-performing Assets of Commercial Banks K G K Subba Rao
 https://shodhganga.inflibnet.ac.in/handle/10603/143519
 https://thewire.in/banking/raghuram-rajan-npa-parliamentary-committee-modi-
government
 https://www.prsindia.org/content/examining-rise-non-performing-assets-india
 https://economictimes.indiatimes.com/industry/banking/finance/banking/gross-npas-of-
public-sector-banks-have-declined-by-over-rs-89000-cr-till-march-
govt/articleshow/70379980.cms?from=mdr