An assignment ON

NON-PERFORMING ASSETS (NPA)

Faculty of Management Studies Banaras Hindu University
of Management of Financial Institutions and services in partial fulfillment of the requirement for two year full time Masters’ Programme in MBA

Submitted to Prof Raj Kumar Faculty of Management Studies Banaras Hindu Universdity Vsaranasi

Submitted by Abhishek Bhushan
MBA - III Sem. 2011-12 Roll No.-55 Enrollment no.:295656 Examination Roll No. 07M51001

borrowings and recycling of funds received back from borrowers constitute a major part of funding credit dispensation activity. which reduces the over all profits and shareholders value. The NPA growth involves the necessity of provisions. which arises from the failure of borrower.Non Performing Asset ABSTRACT A strong banking sector is important for flourishing economy. Thus. Lending is generally encouraged because it has the effect of funds being transferred from the system to productive purposes. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. NPAs reflect the performance of 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. The severity of the problem is however acutely suffered by Nationalised Banks. The paper deals with understanding the concept of NPAs. Despite various correctional steps administered to solve and end this problem. followed by the SBI group. The issue of Non Performing Assets has been discussed at length for financial system all over the world. 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. these loan losses affect the banks profitability on a large scale. which results into economic growth. CAUSES FOR NON-PERFORMING ASSETS IN PUBLIC SECTOR BANKS Introduction Granting of credit for economic activities is the prime duty of banking. 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. Non-performing assets are one of the major concerns for banks in India. and the all India Financial Institutions. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade. concrete results are eluding. However lending also carries a risk called credit risk. Though complete elimination of such losses is not possible. . Apart from raising resources through fresh deposits. but banks can always aim to keep the losses at a low level. Non-recovery of loans along with interest forms a major hurdle in the process of credit cycle. The problem of NPAs is not only affecting the banks but also the whole economy. 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 and endurability of the affected banks. The failure of the banking sector may have an adverse impact on other sectors.

. The Indian banking system had acquired a large quantum of NPAs. The NPAs as a percentage of net advances and total assets have been declining but actual numbers are increasing. If any advance or credit facilities granted by banks to a borrower becomes non-performing. which can be termed as legacy NPAs. Viewed with this perspective. A distinction is often made between Gross NPA and Net NPA. The RBI is moving over to one-quarter norm from 2004 onwards. NPAs seem to be growing in public sector banks over the years. which has stopped earning an expected reasonable return. the NPA is a result of an environment that prevents it from performing up to expected levels. from Gross NPA. Though the term NPA connotes a financial asset of a commercial bank. attracted the attention of public. it is also a reflection of the productivity of the unit. The definition of NPAs in Indian context is certainly more liberal with two quarters norm being applied for classification of such assets. firm. concern. ii. industry and nation where that asset is idling. Net NPA is obtained by deducting items like interest due but not recovered. the NPAs that are considered to be at higher levels than those in other countries have of late. 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. However with effect from March 2004. To examine the causes for NPAs in public sector banks. To understand the meaning & nature of NPAs. part payment received and kept in suspense account etc. Magnitude of NPAs In India. default status would be given to a borrower if dues are not paid for 90 days. 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.Objectives of the study i. .

On the other hand a combination of directed lending and social banking relegated profitability and competitiveness to the background. As far as old NPAs are concerned. which was operating in a closed economy. a bank can remove it on its own or sell the assets to AMCs to clean up its balance sheet. now faces the challenges of an open economy. Relating to existing NPAs. Postponement of problem in order to show higher earnings. To reduce fresh NPA generation. 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 sectors. The Indian banking system. The net result was unsustainable NPAs and consequently a higher effective cost of banking services.Dealing with NPAs involves two sets of policies 1. accumulated over the years. 2. . iii. As of today nearly 7 percent of Gross NPAs are locked up in 'hard-core' doubtful and loss assets. Manipulation of debtors using political influence. ii. For preventing fresh NPAs. the bank itself should adopt proper policies. On one hand a protected environment ensured that banks never needed to develop sophisticated treasury operations and Asset Liability Management skills. The problem India Faces is not lack of strict prudential norms but i. The legal impediments and time consuming nature of asset disposal proposal. Causes for Non Performing Assets A strong banking sector is important for a flourishing economy. The failure of the banking sector may have an adverse impact on other sectors.

Singh. Poor recovery of receivables. fraud. There are several reasons for an account becoming NPA. For Example. 2. 4. SUME. Excess capacities created on non-economic costs. V. especially in public sector banks. * Internal factors * External factors Internal factors: 1. 3. under the Prime Minister ship of Mr. In-ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets.. mis-appropriation etc. disputes. 6. Loans given by banks are their assets and as the repayment of several of the loans were poor. 8. Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister concerns. Project not completed in time. loan proposal evaluations were slack and as a result repayment were very poor. Business failures.Macro Perspective Behind NPAs A lot of practical problems have been found in Indian banks. Credit allocation became 'Loan Melas'. Funds borrowed for a particular purpose but not use for the said purpose. The huge amount of loan granted under these schemes were totally unrecoverable by banks due to political manipulation. 15. 5. RREP. Poverty elevation programs like IRDP.. for rural debt during 1989-90. SEPUP. the government of India had given a massive wavier of Rs. Willful defaults. the quality of these assets were steadily deteriorating. siphoning of funds.000 Crs. 7. misuse of funds and non-reliability of target audience of these sections. PMRY etc. failed on various grounds in meeting their objectives.P. JRY. . management disputes. This was not a unique incident in India and left a negative impression on the payer of the loan.

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. In the changed context of new prudential norms and emphasis on quality lending and profitability. 4.. 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. monitoring and follow-ups.. Sluggish legal system – Long legal tangles Changes that had taken place in labour laws and lack of sincere effort. power and other resources. 2. There is also a general perception that the prescription of 40% of net bank credit to priority sectors have led to higher NPAs. adverse exchange rates etc. External factors: 1. in credit appraisal. 6. selection of right borrowers. raw material\input price escalation. instead steps should be taken to covert NonPerforming Assets into Now-Performing Assets. Managers of rural and semiurban branches generally sanction these loans. correct end use of funds and timely recovery of loans is absolutely necessary pre conditions for preventing or minimizing the incidence of new NPAs. power shortage. 5. adequate finance and timely disbursement. natural calamities like floods. . non payment\ over dues in other countries. However. Concluding Remarks A strong banking sector is important for a flourishing economy. Government policies like excise duty changes. Failures. Deficiencies on the part of the banks viz. Import duty changes etc. 3. Scarcity of raw material. banks are yet another sector where the rot has already set in. Over the years. Hence. recession in other countries. externalization problems.9. Shortage of raw material. delay in settlement of payments\ subsidiaries by government bodies etc. Industrial recession. due to credit to these sectors becoming sticky. 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. viable economic activity. industrial recession. accidents. It's now or never. The failure of the banking sector may have an adverse impact on other sectors. excess capacity.

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