A healthy banking system is essential for any economy striving to achieve growth and remain stable in competitive global business environment. Multiple macroeconomic, demographic, and technological developments make the Indian banking sector one of the most attractive opportunities globally. Challenges like high stressed asset levels and fragmented ndustry structure are dragging down performance and threatening future growth. The best indicator for the health of the banking industry in a country is its level of Non-performing assets (NPAs).Urgent attention is required to ensure that the sector can continue to be a key driver of Indian economy.

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Growing NPAs and Future of Banking in India
Vinay Shahane
Student, Department of Management Studies, SIPNA COET, Amravati (M.S.) India -444605,
vinayshahane0893@gmail.com
Mobile No: 7507348084
Abstract: A healthy banking system is essential for any economy striving to achieve growth and
remain stable in competitive global business environment. Multiple macroeconomic,
demographic, and technological developments make the Indian banking sector one of the most
attractive opportunities globally. Challenges like high stressed asset levels and fragmented
industry structure are dragging down performance and threatening future growth. The best
indicator for the health of the banking industry in a country is its level of Non-performing assets
(NPAs).Urgent attention is required to ensure that the sector can continue to be a key driver of
Indian economy. Recent steps announced by the government, like the ordinance to amend the
Banking Regulation Act, 1949, Financial Resolution and Deposit Insurance Bill have set the
stage for taking this agenda forward. Recent government-backed initiatives like Aadhaar,
DigiLocker, and IndiaStack are creating publicly accessible, unified digital infrastructure
through which customers can allow financial institutions to access their information. The
development of this infrastructure presents extraordinary opportunities for Indian banking.
Despite these positive trends, Indian banking is under stress. Inherent structural challenges are
getting exposed as the industry has been subjected to multiple shocks over the last few years.
Indian banking sector lags behind other countries on health, risk, and efficiency metrics. The key
challenges are high fragmentation levels, limited differentiation among players, and the inherent
restrictions of state ownership on the PSBs. This paper deals with understanding the concept of
NPAs, its magnitude and major causes for an account becoming non-performing and strategies
for managing NPA in Indian banks.
Keywords: PSB, NPA, Aadhaar, SCB, NPS, GDP
I. Introduction
India is one of the top 10 economies in the world, where the banking sector has tremendous
potential to grow. Across the globe, the banking sector acts as the catalyst for the country’s
economy. Banks play a vital role in providing financial resources especially to capital-intensive
sectors such as infrastructure, automobiles, iron and steel, industrials and high-growth sectors
such as pharmaceuticals, healthcare and consumer discretionary. In emerging economies, banks
are more than mere agents of financial intermediation and carry the additional responsibility of
achieving the government’s social agenda also. Because of this close relationship between

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banking and economic development, the growth of the overall economy is intrinsically correlated
to the health of the banking industry.
A significant rise in non-performing assets (NPAs) of the banking system, especially public
sector banks (PSBs), is a matter of concern, and the Reserve Bank of India (RBI), Central
Government and commercial banks are trying to address the situation. The global slowdown and
uncertain market conditions are generally blamed for the grim banking situation. The general
refrain of PSBs is that they operate under constraints, are vulnerable to political pressures, and
are not on equal footing with private financial institutions as they have to lend to certain
segments of the economy in consideration of social responsibilities. However, the trend in
stressed assets reveals that higher NPAs are spread-out across the economy, including priority
sector. And major stressed sectors are infrastructure, iron and steel, textiles, aviation and mining.
Therefore, it would be interesting to examine important causes and reasons to help in correcting
the situation. In a slowing economy, it is natural to assume that NPAs will increase but the
primary cause of rising NPAs may not only be economic slowdown but also deficiencies in
procedures followed in extending and monitoring credit itself as there are significant differences
in approaches pursued by PSBs and private sector banks (PVBs).
OBJECTIVE
1. To find out trend in NPA level
2. To find out the factors that contributes to NPA.
3. To suggest the various measures for proper management of NPA in banks.
II. Methodology
This paper is the outcome of a secondary data on Indian Banking Sector with special reference to
Indian context. To complete this, annual reports, various books, journals and periodicals have
been consulted, several reports on this particular area have been considered, and internet
searching has also been done.
Current Economic Conditions and NPAs
Domestic Economy & Markets
Domestically macroeconomic conditions remained stable and the expectations of accelerated
reforms and political stability further reinforced the overall positive business sentiment. Retail
inflation witnessed significant decline during the recent quarters and the real gross value added
(GVA) growth decelerated to 6.6 per cent in 2016-17 from7.9 per cent in 2015-16, largely

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reflecting slowdown in services. Government’s commitment to fiscal discipline had a positive
impact on macroeconomic outlook. However, concerns arise over States’ fiscal position and the
stretched debt capacities of some parastatals. Going forward, reforms in foreign direct
investment, implementation of goods and services tax (GST), and revival in external demand are
likely to contribute to a better growth outlook. The impact of demonetization, if any, on
exchange rate and portfolio flows was fleeting. Amidst concerns over asset quality, credit
intermediation by public sector banks has retrenched while that by NBFCs and mutual funds has
increased significantly. Notwithstanding the current benign conditions, it is important to guard
against geopolitical risks.
Secular trends make Indian banking inherently attractive: Multiple macroeconomic,
demographic, and technological developments make the Indian banking sector one of the most
attractive opportunities globally. The broader Indian economic growth story continues
unabated—GDP grew at 7 percent in 2016, and growth rate could increase to 7.7 percent by
2020. Additional indicators like upward consumer mobility also point to a bright macroeconomic
future.

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However, even more significant is the pace of digital adoption in the country. India continues to
outpace many major economies in growth of mobile usage. Recent government-backed
initiatives like Aadhaar, DigiLocker, and IndiaStack are creating publicly accessible, unified
digital infrastructure through which customers can allow financial institutions to access their
information. The development of this infrastructure presents extraordinary opportunities for
Indian banking.
Perfect Storm in banking in India; immediate interventions needed: Despite these positive
trends, Indian banking is under stress. Inherent structural challenges are getting exposed as the
industry has been subjected to multiple shocks over the last few years. Indian banking sector lags
behind other countries on health, risk, and efficiency metrics. The key challenges are high
fragmentation levels, limited differentiation among players, and the inherent restrictions of state
ownership on the PSBs.
As a result, banking in India is in a “Perfect Storm” –
 At the macroeconomic level, despite one of the deepest continuous rate cuts since the
financial crisis, credit growth has stagnated. Loan volume has shrunk by 0.1 percent

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between March and December 2016, as Indian corporate deal with a large burden of
distressed loans. Moreover, the 2016 demonetization exercise brought massive levels of
surplus liquidity into the system—this deposit surge, along with credit slowdown, has
brought down the CD ratio of banks.
 The stressed asset burden continues to grow, with the distressed loan volume crossing
INR 10lakh crores in December 2016. The challenge is especially acute for the public-
sector banks (PSBs), where stressed assets surpass their net worth. Current provision
levels are inadequate, with a gap of nearly INR 600,000 crores between the level of
stressed assets in the system and the provisions made. As these stressed assets continue to
turn bad, the entire equity base of the banks could be at risk
 Dramatic technological shifts are surfacing new opportunities and challenges for
banking. Indian consumers are more digital than ever, with a dramatic fall in costs
driving a surging growth in internet use. Consumers increasingly turn to digital channels

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to meet their financial needs, but this means that the traditional value chain is vulnerable
to digital disruption.
 The changing regulatory posture is facilitating the emergence of a digital, inclusive,
interoperable, and competitive financial services market. An overhauled banking license
regime is encouraging the entry of new players, both domestic and foreign. Government
interventions are enabling digital business models through the creation of hard, publicly
accessible data assets. However, growing restrictions on corporate lending practices
could have a chilling effect on wholesale loan growth.
As the “perfect storm” continues, the industry is becoming increasingly polarized. Private-sector
banks outperform the state-owned ones and continue to capture an ever-greater share of the
market, as the latter remain burdened by legacy and the constraints of public sector ownership.
III. Data Analysis & Interpretation
Gross NPAs and total stressed assets:
The total stressed assets in the Indian commercial banks have risen to 11.5% with the Public
Sector Banks leading the strain at 14.5% as at end-March 2016. They still contain some amount
of restructured assets indicating potential for some more pain, but of lesser intensity.

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Incremental NPAs:
Let us now look at the year- on- year accretion to the NPAs. One could see that
incremental accretion to NPAs is quite substantial (Chart 3). There was a big addition post-AQR
exercise. What we need to realize is that, maybe, going forward addition to NPAs may moderate
but the provisioning needs as the NPAs age will put pressure on the P&L.
Sectoral distribution of NPAs:
Source: RBI
It would also be interesting to look at the sectoral distribution of NPAs and total stressed assets
(Chart 4). It shows the obvious - the maximum stress in industry and infrastructure with the
PSBs facing greatest strain across most sectors (Chart 5).

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Factors contributing to NPA
According to the recent study conducted by RBI, the factors contributing to NPA are divided
into:
(i) Internal factors
(ii)External factors
(iii) Other factors
Internal factors
a) Diversion of fund for expansion, diversification, modernization or for taking up new
projects.
b) Diversion of fund for assisting or promoting associate concerns.
c) Time or cost overrun during the project implementation stage.
d) Business failure due to product failure, failure in marketing etc.
e) In efficiency in bank management.
f) Slackness in credit management and monitoring.
g) In appropriate technology or problems related to modern technology.
External factors
a) Recession in the economy as a whole.

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b) Input or power shortage.
c) Price escalation of inputs.
d) Exchange rate fluctuations
e) Change in government policies
Strategies for overcoming NPAs
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
pre-sanctioning 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.

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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
 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

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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. 5lakh for compromise settlement under
LokAdalat. Debt recovery tribunals have been empowered to organize Lok Adalat to decide on
cases of NPAs of Rs. 10lakh 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 of1993) 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. The recovery of
debts due to banks and financial institution passed in March 2000 has helped in strengthening the
function of DRTs. Provision for placement of more than one recovery officer, power to attach
defendant’s property/assets before judgment, penal provision for disobedience of tribunal’s order
or for breach of any terms of order and appointment of receiver with power of realization,
management, protection and preservation of property are expected to provide necessary teeth to
the DRTs and speed up the recovery of NPAs in the times to come. DRTs which have been set
up by the Government to facilitate speedy recovery by banks/DFIs, have not been able make

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much impacton loan recovery due to variety of reasons like inadequate number, lack of
infrastructure, under staffing and frequent adjournment of cases. It is essential that DRT
mechanism is strengthened and vested with a proper enforcement mechanism to enforce their
orders. Non observation of any order passed by the tribunal should amount to contempt of court,
the DRT should have right to initiate contempt proceedings. The DRT should empowered to sell
asset of the debtor companies and forward the proceed to the winding – up court for distribution
among the lenders.
V Conclusion
The problem of NPAs can be overcome only with proper credit assessment and risk
management mechanism. In a situation of liquidity overhang, the enthusiasm of the banking
system to increase lending may compromise on asset quality, raising concern about their adverse
selection and potential danger of addition to the stock of NPAs. It is necessary that the banking
system is to be equipped with prudential norms to minimize if not completely to avoid the
problem of NPAs. The onus for containing the factors leading to NPAs rests with banks
themselves. This will necessitates organizational restructuring, improvement in the managerial
efficiency and skill up gradation for proper assessment of credit worthiness. It is better to avoid
NPAs at the nascent stage of credit consideration by putting in place of rigorous and appropriate
credit appraisal mechanisms.
References
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D888D79AC.PDF
[2]. https://iimb.ac.in/research/sites/default/files/WP%20No.%20507.PDF
[3]. https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/WSN03070214F.PDF
[4]. Aggarwal, S., & Mittal, P. (2012). Non-Performing Asset: Comparative Position of Public and Private
Sector Banks in India, International Journal of Business and Management Tomorrow, Vol.2 (1).
[5]. Chaudhary, S., & Singh, S. (2012). Impact of Reforms on the Asset Quality in Indian Banking, International
Journal of Multidisciplinary Research Vol.2(1).13-31. Chhimpa, J. (2002), Incremental NPA: Stem that
Inflow, Vinimaya, 23(3): 18-21.