ABSTRACT A strong banking sector is important for flourishing economy.

The failure of the banking sector may have an adverse impact on other sectors. Non-performing assets are one of the major concerns for banks in India. NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. The NPA growth involves the necessity of provisions, which reduces the over all profits and shareholders value. The issue of Non Performing Assets has been discussed at length for financial system all over the world. The problem of NPAs is not only affecting the banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade. The paper deals with understanding the concept of NPAs, its magnitude and major causes for an account becoming non-performing, projection of NPAs over next three years in Public sector banks and concluding remarks.

CAUSES FOR NON-PERFORMING ASSETS IN PUBLIC SECTOR BANKS
Introduction: Granting of credit for economic activities is the prime duty of banking. Apart from raising resources through fresh deposits, borrowings and recycling of funds received back from borrowers constitute a major part of funding credit dispensation activity. Lending is generally encouraged because it has the effect of funds being transferred from the system to productive purposes, which results into economic growth. However lending also carries a risk called credit risk, which arises from the failure of borrower. Non-recovery of loans along with interest forms a major hurdle in the process of credit cycle. Thus, these loan losses affect the banks’ profitability on a large scale. Though complete elimination of such losses is not possible, but banks can always aim to keep the losses at a low level. Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressing signals on the sustainability of the affected banks. The positive results of the chain of measures affected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this contemporary period have been neutralized by the ill effects of this surging threat. Despite various correctional steps administered to solve and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. The severity of the problem is however acutely suffered by Nationalised Banks, followed by the SBI group, and the all India Financial Institutions. Objectives of the study: i. To understand the meaning & nature of NPAs. ii. To examine the causes for NPAs in public sector banks. iii. To project the NPAs in public sector banks over next three years using Trend Analysis as a tool. Methodology In order to meet the Third objective, the method of Moving Averages is been used, from which we arrive at a Trend Analysis. While the rationale behind selection of 'Three year Moving Average' method is because of the availability of the data. The data available was from the ten years and needless to say that for such a data a 'Six year Moving average' or a 'Eight year Moving Average' will not work out.

firm. which can be termed as legacy NPAs. Dealing with NPAs involves two sets of policies 1. default status would be given to a borrower if dues are not paid for 90 days. it is also a reflection of the productivity of the unit. The RBI is moving over to one-quarter norm from 2004 onwards. then the bank will have to treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact that there may still exist certain advances / credit facilities having performing status. the NPA is a result of an environment that prevents it from performing up to expected levels. Net NPA is obtained by deducting items like interest due but not recovered. concern. part payment received and kept in suspense account etc. On the other hand a combination of directed lending and social banking relegated profitability and competitiveness to the background. If any advance or credit facilities granted by banks to a borrower becomes non-performing. from Gross NPA. NPAs seem to be growing in public sector banks over the years. now faces the challenges of an open economy.. The Indian banking system had acquired a large quantum of NPAs. For preventing fresh NPAs. Relating to existing NPAs 2. Viewed with this perspective. the NPAs that are considered to be at higher levels than those in other countries have of late. the bank itself should adopt proper policies. To reduce fresh NPA generation. A distinction is often made between Gross NPA and Net NPA. industry and nation where that asset is idling. The Indian banking system. Causes for Non Performing Assets A strong banking sector is important for a flourishing economy. However with effect from March 2004. As far as old NPAs are concerned. The definition of NPAs in Indian context is certainly more liberal with two quarters norm being applied for classification of such assets. As shown in the above table –1 over the years the NPAs as a percentage of net advances and total assets have been declining but actual numbers are increasing. Though the term NPA connotes a financial asset of a commercial bank. attracted the attention of public. The net result was unsustainable NPAs and consequently a higher effective cost of banking services. Magnitude of NPAs In India. a bank can remove it on its own or sell the assets to AMCs to clean up its balance sheet. The failure of the banking sector may have an adverse impact on other sectors. which has stopped earning an expected reasonable return. which was operating in a closed economy. One of the main causes of NPAs into banking sector is the directed loans system under which commercial banks are required a prescribed percentage of their credit (40%) to priority . On one hand a protected environment ensured that banks never needed to develop sophisticated treasury operations and Asset Liability Management skills.Meaning of NPAs: An asset is classified as Non-performing Asset (NPA) if due in the form of principal and interest are not paid by the borrower for a period of 180 days.

power and other resources. management disputes. Scarcity of raw material. loan proposal evaluations were slack and as a result repayment were very poor. accidents. Willful defaults. Industrial recession. Manipulation of debtors using political influence. SUME. excess capacity. power shortage. misuse of funds and nonreliability of target audience of these sections. raw material\input price escalation. 7. 3. Project not completed in time. The problem India Faces is not lack of strict prudential norms but i. Funds borrowed for a particular purpose but not use for the said purpose. Poverty elevation programs like IRDP.. in credit appraisal.sectors. Business failures. Deficiencies on the part of the banks viz. JRY. under the Prime Minister ship of Mr. disputes. ii. failed on various grounds in meeting their objectives. This was not a unique incident in India and left a negative impression on the payer of the loan. siphoning of funds. 8. 5. Excess capacities created on non-economic costs.. The legal impediments and time consuming nature of asset disposal proposal.. Postponement of problem in order to show higher earnings. recession in other countries. Loans given by banks are their assets and as the repayment of several of the loans were poor. There are several reasons for an account becoming NPA. 9. As of today nearly 7 percent of Gross NPAs are locked up in 'hard-core' doubtful and loss assets. . misappropriation etc. delay in settlement of payments\ subsidiaries by government bodies etc.000 Crs. fraud. 3. Failures. Import duty changes etc. for rural debt during 1989-90. Singh. In-ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets. Poor recovery of receivables. Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister concerns. Sluggish legal system Long legal tangles Changes that had taken place in labour laws Lack of sincere effort. 4. Government policies like excise duty changes. the quality of these assets were steadily deteriorating. industrial recession. * Internal factors * External factors Internal factors: 1. 4. For Example. accumulated over the years. iii. RREP. Shortage of raw material. the government of India had given a massive wavier of Rs. SEPUP. non payment\ over dues in other countries. externalization problems. natural calamities like floods. especially in public sector banks. 2. V..P. 2. Macro Perspective Behind NPAs A lot of practical problems have been found in Indian banks. Credit allocation became 'Lon Melas'. adverse exchange rates etc. The huge amount of loan granted under these schemes were totally unrecoverable by banks due to political manipulation. monitoring and follow-ups. 6. PMRY etc. External factors: 1. 15. 6. 5.

this factor also has significant proportion of cases. that the following are the important factors for units becoming sick/weak and constantly accounts turning NPA in the order of prominence: * Diversification of funds (No. * Other factors in order or prominence are Government Policies like changes in Import \ Excise duties etc. * Time \ cost overrun during the project implementation stage leading to liquidity strain and turning NPA into next factor (No. power shortage. 6 above – External factor). inappropriate technology. willful default. fraud \ misappropriation. mostly for expansion \diversification \ modernization. Besides being so. 3 above). product obsolescence. (No 5 above – External factor).. price escalation. disputes etc. 6 above). failure of business (product). accidents etc. 2 above – Internal factor). 7 above – Internal factor). is the single most prominent reason. when compared to other factors. * External factor (No. 8 above – Internal factor) and lastly. Causes for an Account becoming NPA a) Failure to bring in Required capital b) Too ambitious project c) Longer gestation period d) Unwanted Expenses e) Over trading f) Imbalances of inventories g) Lack of proper planning h) Dependence on single customers i) Lack of expertise j) Improper working Capital Mgmt. k) Mis management l) Diversion of Funds m) Poor Quality Management n) Heavy borrowings o) Poor Credit Collection p) Lack of Quality Control a) Wrong selection of borrower b) Poor Credit appraisal c) Unhelpful in supervision d) Tough stand on issues e) Too inflexible attitude f) Systems overloaded g) Non inspection of Units h) Lack of motivation i) Delay in sanction j) Lack of trained staff k) Lack of delegation of work l) Sudden credit squeeze by banks m) Lack of commitment to recovery . (No.Conclusion Regarding Contributory Reasons The study of about 900 top NPA accounts in 27 public sector banks that has been tabulated from the available information revealed by RBI.. inefficient management. deficiencies on the part of banks delays in release of limits and delay in settlement of payments by government bodies (No. taking up of new projects. * Internal factor (No.. comprising industrial recession.

Previously it was four quarters. Assumptions While measuring the future trend of NPAs for next three years in public sector banks. which were not mentioned in the early 90's. d+e+f . it is necessary to select a period for moving average appropriately depending upon the availability of the data. b+c+d . * According to Basel committee Prudential Norms were introduced. ……. The method used for this study is "Trend Analysis – Three year Moving Average Method. then it was made to three quarters and now from come 2004 it will be only one quarter. * Norms regarding Provisions have changed over the last decade. 3. * For commercial Banks the Capital Adequacy Norms are been prescribed recently. * Asset Liability Management Guidelines is expected to be issued by RBI. * It is to be noted that the norms for recognizing NPAs are changing every year. personnel & zeal to a) Lack of Infrastructure b) Fast changing technology c) Un helpful attitude of Government d) Changes in consumer preferences e) Increase in material cost f) Government policies g) Credit policies h) Taxation laws i) Civil commotion j) Political hostility k) Sluggish legal system l) Changes related to Banking amendment Act Projection of NPAs over next three years in public sector Banks The paper focuses on projecting the Non Performing Assets of Public Sector Banks over next three years. 2. 3333 This is one of the flexible methods of measuring the trend. Gross NPAs to Gross Advances Gross NPAs to Total Advances Net NPAs to Net Advances Net NPAs to Total Advances The formula used for "Three year Moving Average" is: A+b+c . which are assumed to be constant. . c+d+e . * Income Recognition norms were introduced in mid 90's. While applying this method." The study focused on measuring the Trend for four aspects: 1.n) Lack of technical. the following are the key issues. In this case the data available was ten years and hence the Three-year moving average found to be suitable for projecting the future trend. 4.

In this vein it would be interesting to see the NPAs both in terms of absolute figures and in terms of percentage of public sector banks in the coming three years. Net NPAs to Total Assets of public sector banks would decrease but at a marginal rate.e 2002-03 to 2004-05) would decrease considerably. there has been a steady and considerable decrease in percentage of Net NPAs to Net Advances. Concluding Remarks A strong banking sector is important for a flourishing economy. Over the years. As the Trend Line suggests that the NPAs of public sector banks will decline marginally both in terms of Gross and Net figures over next three years. as a percentage seems to be declining over the years but the absolute figures seems to be increasing. which the public sector banks have been providing.e 2002-03 to 2004-05). Gross NPAs to Gross Advances: Analysis During the year 1992-93 to 2001-02. Net NPAs to Net Advances: Analysis During the year 1992-93 to 2001-02. Final Analysis: The future picture of Commercial banks more so the public sector banks seem to be rosy. Gross NPAs to Gross Advances of public sector banks would decrease. Gross NPAs to Total Advances: Analysis During the year 1992-93 to 2001-02 . Therefore the GNPAs to Total Assets of public sector banks will decline in the next three years to come (i. there has been a marginal decline in Net NPAs to Total Assets. there has been a sharp decline in Gross NPAs to Gross Advances. 3. it can be concluded that over the next three years (i. The Trend Line also shows that there is a decreasing trend and Net NPAs over next three years (i.e 2002-03 to 2004-05). The Trend Line also shows a continues decreasing trend. The failure of the banking sector may have an adverse impact on other sectors. The Trend Line too says the same story. The Trend Line shows that there has been a steady decline and it can be inferred that over next three years (i. much has been talked about NPAs and the emphasis so far has been only on identification and quantification of NPAs rather than on ways to reduce and upgrade them. there has been considerable decline in GNPAs to Total Assets. There is also a general perception that the prescription of 40% of net bank credit to priority sectors have led to higher NPAs. Net NPAs to Total Assets: Analysis During the year 1992-93 to 2001-02. due to credit to these sectors becoming sticky.1. This may be due to higher provisions. 2. Managers of . 4.e 2002-03 to 2004-05). The real issue to be identified is though the NPAs. From this.

. instead steps should be taken to covert Non-Performing Assets into Now-Performing Assets. In the changed context of new prudential norms and emphasis on quality lending and profitability. However. adequate finance and timely disbursement. selection of right borrowers. It is high time to take stringent measures to curb NPAs and see to it that the Non-Performing Assets may not turn banks into Non-Performing Banks.rural and semi-urban branches generally sanction these loans. managers should make it amply clear to potential borrowers that banks resources are scarce and these are meant to finance viable ventures so that these are repaid on time and relevant to other needy borrowers for improving the economic lot of maximum number of households. correct end use of funds and timely recovery of loans is absolutely necessary pre conditions for preventing or minimizing the incidence of new NPAs. It's now or never . viable economic activity. Hence. banks are yet another sector where the rot has already set in!.

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