This document discusses non-performing assets (NPAs) in the Indian banking sector. It defines NPAs as loans that are overdue for over 90 days. Growing NPAs negatively impact banks' profitability, asset quality, and ability to lend. The document analyzes NPA growth rates between 2000-2011 and the effects of high NPAs, which include reduced returns, higher costs of capital, and banks focusing more on recovery than expanding business. It also discusses strategies for managing NPAs, like quick identification, containment, and timely monitoring and assessment of borrowers.

1. Presented by
Vishal Jain
MBA 3rd Sem.

2. Introduction
The economic progress of a nation and development of
banking is invariably interrelated.
The Indian Banking sector accounts a major portion of
financial intermediation and acknowledged for
formulation of monetary policy and facilitator for
payment systems.

3. Even though bank serves social objective through its
priority sector lending, mass branch networks and
employment generation, maintaining asset quality and
profitability is critical for them.
A major threat to banking sector is prevalence of Non-
Performing Assets (NPAs). NPA represent bad loans, the
borrowers of which failed to satisfy their repayment
obligations.
This affects operational efficiency which in turn affects
profitability, liquidity and solvency position of banks.
 NPA also affect the psychology of bankers in respect of
their disposition of funds towards credit delivery and credit
expansion.

4. Definition of NPA & its categories
A NPA is a loan or an advance where Interest and/ or
installment of principal remain overdue for a period of
more than 90 days in respect of a term loan, overdraft/ cash
credit, bills purchased and discounted.
Categories:
Substandard Assets – Which has remained NPA for a
period less than or equal to 12 months.
Doubtful Assets – Which has remained in the sub-
standard category for a period of 12 months.
Loss Assets – 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.

5. Causes of NPA:
Willful defaults, fraud, disputes, misappropriation of
funds etc.,
Improper selection of borrowers/activities.
Non-compliance of sanction terms and conditions.
Poor debt management by the borrower, leading to
financial crisis.
Inability of the corporate to raise capital through the issue
of equity or other debt instrument from capital markets.
Diversion of funds for expansion/modernization/setting
up new projects.
Deficiencies on the part of the banks like credit appraisal,
monitoring and follow-ups, delay in settlement of
payments.

6. Growth Rate of Net NPA
Year SBI &
Associate
s
Nationali
zed
Banks
Public
Sector
Private
Sector
Foreign
Banks
2000-
07
-3.84 -7.94 -6.53 3.88 10.15
2008-
11
23.70 26.09 24.17 30.07 7.21

7. Impact of NPA
It leads to the credit risk management assuming
priority over other aspects of bank’s functioning. The
bank’s whole machinery would thus be pre-occupied
with recovery procedures rather than
concentrating on expanding business.
The most notable impact of NPA is change in banker’s
sentiments which may hinder credit expansion to
productive purpose. Banks may incline towards more
risk-free investments to avoid and reduce riskiness,
which is not conducive for the growth of economy
The interest income of banks will fall and it is to be
accounted only on receipt basis.

8. Banks profitability is affected adversely because of the
provision of doubtful debts and consequent write off as
bad debts.
 Return on Investment (ROI) is reduced.
The cost of capital will go up.
 The assets and liability mismatch will widen.
 The Economic Value Additions (EVA=Net operating
profit – cost of capital) of banks is reduced.
 It limits recycling of the funds.
The capital adequacy ratio is disturbed as NPAs are
entering into the calculation.

9. Management of NPA
Essential components of sound NPA management are:
1. Quick identification of NPAs
2. Their containment at a minimum level
3. Ensuring minimum impact of NPAs on the financials
4. Evaluation and assessment of the proposal
5. Timely monitoring and evaluation and
6. Proper assessment of exit decision.

10. Other measures
Commercial banks have envisaged new concepts like
income recognition, prudential accounting norms and
capital adequacy ratio etc..,
The traditional measures tried to protect the interests
of deposits through maintaining adequate capital in
liquid form.
Creation of additional benches and enhancing the
capacity of DRT (debt recovery tribunal) can be
rationalized and delays could be avoided.
 In order to reduce the balance of NPAs, they constantly
review and monitor the accounts and the progress of
the project for which the loan has been sanctioned.

11. Conclusion
NPA is a virus affecting banking sector. It affects
profitability, liquidity and solvency, in addition posing
threat on quality of asset and survival of banks. It still
remains a major concern for banks in India. The increased
level of additions to NPA remained as an area of concern as
it indicates the real efficiency of credit risk management.
The recessionary pressures faced by the banking sector is
an important reason for the growth of NPA indicators, it
should be managed to maintain a healthy and viable
banking environment