This document discusses non-performing assets (NPAs) in the Indian banking sector. It defines NPAs as loans where interest or principal payments are overdue by 90 days. NPAs hurt bank profitability, liquidity, and solvency. The growth of NPAs indicates inefficiencies in credit risk management. While NPAs pose a major challenge, banks must manage them to maintain a healthy banking environment. Quick identification, containment, and recovery of NPAs are essential, as is timely monitoring of loan accounts.

1. BY
SUPRIYA. M.D.
.

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.
 The Banking sector is an indispensable financial
service sector supporting development plans through
channelizing funds for productive purpose,
intermediating flow of funds from surplus to deficit
units and supporting financial and economic policies
of government.

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. Provisioning Norms
 Substandard Assets – 10% on total outstanding
balance, 10 % on unsecured exposures identified as
sub-standard & 100% for unsecured “doubtful”
assets.
 Doubtful Assets – 100% to the extent advance not
covered by realizable value of security. In case of
secured portion, provision may be made in the range
of 20% to 100% depending on the period of asset
remaining sub-standard.
 Loss Assets – 100% of the outstanding.

6. 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.

7. Growth Rate of Net NPA
Year SBI &
Associat
es
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

8. 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.

9.  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.

10. 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.

11. 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.

12. 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