NON-PERFORMING ASSETS OF

COMMERCIAL BANKS IN INDIA

Drishti Jain 161380
Sanya Arora 161378
Vasvi singh 161458
Amisha Gupta 161452
Devangana Vaish 161454
Anika Garg 161347
Monal Nasa 161368
Annanya Mittal 160181

November 2017

1 Absract
A well-built banking sector is significant for a prosperous economy. The crash of the
banking sector may have an unfavorable blow on other sectors. A banker shall be very
cautious in lending, because banker is not lending money out of his own capital. A
major portion of the money lent comes from the deposits received from the public and
government share. The Indian banking sector has been facing serious problems of raising
Non- Performing Assets (NPAs). The NPAs growth has a direct impact on profitability
of banks. Non- performing assets are one of the major concerns for scheduled commercial
banks in India. The recommendations of Narasimham committee and Verma committee,
some steps have been taken to solve the problem of old NPAs in the balance sheets of
the banks. It continues to be expressed from every corner that there has rarely been
any systematic evaluation of the best way of tackling the problem. There seems to
be no unanimity in the proper policies to be followed in resolving this problem. At
present NPA in the banking sector is debate topic because NPA is increasing year by
year particularly in nationalized banks The Gross Non-Performing Assets (GNPAs) of
Nationalized Banks as on June 2012 were Rs.73,038 crore which amount to 2.94% of
Gross Advances.

2 Introduction
A Non-Performing Asset (NPA) is defined as a credit facility in respect of which the
interest and/or installment of Bond finance principal has remained ’past due’ for a spec-
ified period of time. In India, the definition of NPAs has changed over time. According

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to the Narasimham Committee Report (1991), those assets (advances, bills discounted,
overdrafts, cash credit etc.) for which the interest remains due for a period of four quar-
ters (180 days) should be considered as NPAs. Subsequently, this period was reduced,
and from March 1995 onwards the assets for which the interest has remained unpaid for
90 days were considered as NPAs.

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. NPA is used by institutions
that refer to loans in case of default. NPAs are an indicator of the performance of banks
and its growth has a direct effect on profitability of banks. A high level of NPA means
high probability of a huge number of defaults that has an effect on the profitability and
net-worth of banks and also reduces the value of the asset. NPAs have an impact on
liquidity and profitability, in addition to posing threat on quality of asset and survival
of banks.

Narasimham Committee that mandated identification and reduction of NPAs to be

treated as a national priority because NPA direct toward credit risk that bank faces and
its efficiency in allocating resources. Profitability and earnings of banks are affected due
to NPA numbers. If we glance on the numbers of non-performing assets we may come to
know that in the year 1995 the NPAs were Rs. 38385 crore and reached to 71047 crore
in 2011 in Public sector banks and comparatively in the year 2001 the NPAs were Rs.
6410 crore and reached to Rs. 17972 crore in 2011 in Private sector banks.

The problem of NPAs is not only affecting the banks but also the entire Indian econ-
omy. In fact good level of NPAs in Indian banks is a reflection of the state of health of
the industry and trade. It is essential to cut down NPAs to upgrade the financial health
in the banking system.

Causes for Creation of Non-Performing Assets

• External causes: Natural calamities and climatic conditions, Recession, changes

in Government policies changes in economic conditions, Industry related problems,
Impact of liberalization on industries, Technical problems.

• Internal causes: Internal defaulters, Faculty projects, Most of the project reports
are ground realities, proper linkages, product pricing etc. Some approach for the
heck of starting a venture, with poor knowledge of product risks, over depended
on poorly paid killed workers and technicians, Building up pressure for sanctions,
Inept handling by banker’s lack of professionalism and appraisal standards, Non-
observance of system, procedures and non-insistence of collaterals etc, Lack of post
sanction monitoring, unchecked diversions.

The impact of NPAs on the profitability of the banks is summarized in

the following points

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 1. Reduces earning capacity of the assets: NPAs reduce the earning capacity
of the assets and as a result of this the return on assets gets affected.

2. Blocks capital: NPAs carry risk weight of 100% (to the extent it is uncovered).
Therefore they block capital for maintaining Capital adequacy. As NPAs do not
earn any income, they are adversely affecting Capital Adequacy Ratio of the bank.

3. Incurrence of additional cost: Carrying of NPAs require incurrence of ’Cost

of Capital Adequacy’, ’Cost of funds in NPAs’ and ’Operating cost for monitoring
and recovering NPAs’.

4. Reduces EVA: While calculating Economic Value Added (EVA =Net operating
profit after tax minus cost of capital) for measuring performance towards share-
holders value creation, cumulative loan loss provisions on NPAs is considered as
capital. Hence, it increases cost of capital and reduces EVA.

5. Low yield on advances: Due to NPAs, yield on advances shows a lower figure
than actual yield on ’standard Advances’. The reasons that yield are calculated
on weekly average total advances including NPAs.

Various Steps for Reducing NPAs

1. Prepare a loan recovery policy and strategies for reducing NPAs.

2. Create special recovery cells as Head Office/Zonal office/Regional office levels iden-
tify critical branches for recovery

3. Fix targets of recovery and draw time bound action programmer

4. Select proper techniques for solving the problem of each NPA

5. Monitor implementing of the time bound action plan

6. Take corrective steps when ever found necessary while monitoring the action plan
and make changes in the original plan if necessary.

3 Literature Review
This section provides an overview of some of the existing literature with regard to the
NPA. This literature review helps to get a better understanding of both the research
topic and the existing gap.

Asha Singh (2013) stated that Non-Performing Assets have negative impact on
stability of banks and affect their growth. Issue of NPA and its impact on profit and
quality of asset was not a serious concern in Indian banking prior to 1991. Asset quality
was not main concern in Indian banking sector till 1991, but was mainly focused on per-
formance objectives such as opening wide branches, development of rural areas, higher

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employment generation, etc.
A study was conducted by Reserve Bank of India to estimate the factors which con-
tributed for the high level of NPAs in the banks covering 800 top NPA accounts in 33
banks. The study also revealed that the major factors contributing to loans becoming
NPAs include diversion of funds for expansion, diversification, modernization, undertak-
ing new projects and for helping associate concerns. This is coupled with recessionary
trend and failure to tap funds in the capital and debt markets, business failure inefficient
management, inappropriate technology/technical problems, product obsolescence, short-
age, price escalation, accidents, natural calamities, Government policies like changes in
excise duties, pollution control orders, etc. Reduction of NPAs in banking sector should
be treated as a national priority issue to make the Indian banking system stronger, re-
silient and geared to meet the challenges of globalization.

Kavitha. N (2012) talked about the magnitude and impact of non performing
asset on the economy and its profitability. Credit of total advances was in the form of
doubtful assets in the past and has an adverse impact on profitability of all Public Sec-
tor Banks affected at very large extent when NPAs work with other banks and affect its
productivity and efficiency in the banking sector. There is increase in advances over the
period of the study. The decline in ratio of Non-performing Assets shows improvement
in the assets quality of SBI groups, Nationalized Banks and Private Sector Banks.

Khedekar Pooja S.(2012) The global financial meltdown of 2008-10 was a ma-
jor setback for Indian Banking Sector. But in 2010-11 Indian Banking sector became
evident with a even more strong position. NPA of any banking sector is an essential
element and plays a major role in determining the credit risks and efficiency of allocation
of resources. The increase in interest rates has an direct impact on the non-performing
assets. An increase in the interest rates leads to increase in the non-performing assets
which further increases the necessity of creating provisions and therefore reducing the
overall profitability of banks. The impact of reduction in profitability is not just limited
to a single bank or a banking sector rather it affects the economy as a whole. Therefore,
it is important to identify the causes of NPA and minimize its impact to build a strong
Banking Sector essential for a flourishing economy.

Debarsh and Sukanya Goyal (2011) focused on managing of non-performing

assets in the perspective of the public sector banks in India under asset classification
norms, use of good technological platform based on Core Banking Solution, recovery
procedures and other bank specific indicators given by RBIs regulatory framework. The
reduction of non-performing asset is necessary to improve profitability of banks and it
is an important parameter for analysing financial performance of a bank as it results in
decreasing higher provisioning requirements for doubtful debts.

Harish N. The best way to expand Indian Banking sector is to have ties with the
global banking sector but despite of Indias achievements and sounding claims, in the

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past few years weve seen that it has failed to tie up with the global banking sector. The
major reason for a slow progress in our banking sector is the unwillingness of the banks
to take up the new projects for credit expansion due to the demanding non-performing
assets. Non-performing assets are not only non remunerative but they add cost to the
credit management due to which banks become a burden on the economy. The entire
Indian economy is weighed down due the NPAs as it affects the profitability, liquidity
and competitive functioning of banks and developmental of financial institutions and
finally the psychology of the bankers in respect of their disposition towards credit de-
livery and credit expansion. And to top it all of banks are required to make provisions
for such NPAs from their current profits. Apart from internal and external complexi-
ties, increase in NPAs directly affects banks’ profitability, sometimes even their existence.

Veerakumar, K.(2012) The Indian banking sector has been facing serious prob-
lems of raising Non Performing Assets (NPAs). NPAs have been eating the banking
industries from within, since nationalization of banks took place in 1969. NPAs have
choked off quantum of credit, restriction the recycling of funds and leading to mismatches
of asset and liabilities. It also affected profitability, liquidity and solvency position of
the Indian banking sector. One of the major reasons for NPAs in the banking sector is
the ’Direct Lending System’ by the RBI under social banking motto of the Government,
under which scheduled commercial banks are required to lend 40% of their total credit
to priority sector. The banks who have advanced to the priority sector and reached the
target suffocated on account of raising NPAs, since long. The priority sector NPAs have
reached greater heights both in terms of percentage and absolute growth. The present
paper is an attempt to study the priority sector advances by the public, private and
foreign bank group-wise, accomplishment of their targets and a comparative study on
priority and non priority sector NPAs over the period of 10 years between 2001-02 and
2010-11. This paper also aims to find out the categories of priority sector advances which
contribute to the growth of total priority sector NPAs during the period under study.

PaulPurnendu, Bose, Swapan and Dhalla, Rizwan S. (2011) In this paper

an attempt has been made to measure the relative efficiency of Indian PSU banks on
overall financial performances. Since, the financial industry in a developing country like
India is going through a very unstable pace of restructuring, it is essential for a bank to
continuously monitor their efficiency on Non-Performing Assets, Capital Risk-Weighted
Asset Ratio, Business per Employee, Return on Assets and Profit per Employee. Here,
Non-Performing Assets is a negative financial indicator. To prove , we offer a framework
to measure efficiency of Indian public sector banks.

S.N. Bidani (2002) According to him, non-performing assets are the major reason
behind the threatening of stability of Indian banks. Since it writes off the principal loan
amount itself and is the reason behind the loss of interest income, it has a negative effect
on the banks profitability.

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 Toor N.S. (1994) stated that recovery of non-performing as-sets through the pro-
cess of compromise by direct talks rather than by the lengthy and costly procedure of
litigation. He suggested that by constant monitoring, it is possible to detect, the sticky
accounts, the incipient sickness of the early stages itself and an attempt could be made
to review the unit and put it back on the road to recovery.

Selvarajan B. and Vadivalagan, G.(2012) The Indian banking system,attempting

to integrate with global banking has faced a lot of obstacles despite its lofty achieve-
ments. In a developing nation such as India,banking as in an important instrument
for development. However, with instruments like NPA,banks have begun to burden the
economy. Non performing assets have impacted profitability,liquidity and development
of financial institutions.NPAs do not generate income for the banks but banks have to
provide for the NPAs out of their current profits. Apart from this ,NPAs can make the
banks existence apprehensive alongside affecting their profitability. NPAs add cost to
credit management depsite being gainful which influences the competitive functioning
of banks.

Meeker Larry G. and Gray Laura (1987) Around 1980s, the public received
an opportunity to review the bank asset quality by way of non performing assets. The
study was conducted to analyse the information which suggested that NPA information
can be used to assess the asset quality of banks,particularly when the information is
timely.

Joseph, Mabuvre Tendai Edson, Gwangwava (2012) The study found out the
causes of non performing loans in Zimbabwe. Loans form a greater portion of the total
assets in banks. These assets generate huge interest income for banks which determines
the financial performance of banks. Some of these loans tend to fall into non-performing
status and affect the performance of banks. From a critical view of the role of banks
in an economy, it is important to identify problems that affect the performance of these
institutions. This needs to be done since non-performing loans can affect the ability of
banks to play their role in the development of the economy. A case study research design
of CBZ Bank Limited was employed. Many interviews were conducted and question-
naires collected to prepare data for the study. The paper showed that external factors
are more prevalent in causing non-performing loans in CBZ Bank Limited. It was found
that Non performing loans were majorly caused due to factors such as natural disasters,
government policy and the integrity of the borrower.

Murthy, KV Bhanu Gupta, Lovleen (2012) The major reason cited for this
state of health banking industry has been the persistence of NPAs. The study focuses
on the impact of liberalisation on the non performing assets of the four banking seg-
ments that are- public sector, old private sector, new private sector and foreign banks
by studying overall trends in NPAs. The approach used is the Structure - Conduct
- Performance (S-C-P) approach that shows the relationship between competition and

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conduct, concentration and growth in NPAs. The results show how on an average across
the banking industry segments, average non performing assets in the past 11 years have
been declining at the rate of 13% p.a. compounded growth rate. The old private sector
banks non performing assets have reduced at the rate of 11.98% and that of public sector
banks have declined at the rate of 18% and foreign banks at 11.4%. Although the new
private sector banks and the foreign banks seem to be motor efficient than public sector
banks and old private sector banks, their conduct fails to show consistency and stability.

4 Conclusion
The Non-Performing Assets have always created a big problem for the banks in India.
It is just not only problem for the banks but for the economy too. The money locked
up in NPAs has a direct impact on profitability of the bank as Indian banks are highly
dependent on income from interest on funds lent. Although various steps have been
taken by government to reduce the NPA but still a lot needs to be done to curb this
problem. Management of non-performing assets is not limited to recovery of dues. It
involves careful planning, understanding the reasons for default, problems/ faced by
individual borrower and then deciding appropriate course of action for recovery.

• The banks can avoid sanctioning loans to the non-creditworthy borrowers by adopt-
ing certain measures.

• Banker can constantly monitor the borrower in order to ensure that the amount
sanctioned is utilized properly for the purpose to which it has been sanctioned.

• The banker should get both the formal and informal reports about the goodwill of
the customer. If he had already proven as a defaulter then there is no question of
sanctioning loan to him.

• The banker also has to educate the borrowers regarding the effects and conse-
quences of defaulting.

By considering all the above factors the banker can reduce the non-performing assets
in a bank. At last the problem of NPAs has been a major issue for the banking indus-
try. The RBI which is the apex body for controlling level of non-performing assets have
been giving guidelines and getting norms for the banks in order to control the incidents
of faults. Reduction of NPAs in banking sector should be treated as national priority
item to make the Indian Banking system more strong, vibrant and geared to meet the
challenges of globalization.

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