...Integrated Publishing association Review Article ISSN 2229 – 3795 Non performing assets: Issues, Causes and remedial Solution Poongavanam.S H.O.D., Department of Management studies, Ranippettai Engineering College, Thenkaddapanthangal, Walaja Taluk, Vellore District. -632513 Tamil Nadu. s.poongavanam@gmailo.com ABSTRACT The banking industry has undergone a sea change after the first phase of economic liberalization in 1991 and hence credit management. While the primary function of banks is to lend funds as loans to various sectors such as agriculture, industry, personal loans, housing loans etc., in recent times the banks have become very cautious in extending loans, this is due to mounting nonperforming assets (NPAs). Therefore, an NPA account not only reduces profitability of banks by provisioning in the profit and loss account, but their carrying cost is also increased which results in excess & avoidable management attention. Apart from this, a high level of NPA also puts strain on a banks net worth because banks are under pressure to maintain a desired level of Capital Adequacy and in the absence of comfortable profit level, banks eventually look towards their internal financial strength to fulfill the norms thereby slowly eroding the net worth. Considering all the above facts banking industry has to give more importance to NPA and to structure proper remedial solutions. Key words: Assets restructuring company, Global competition, Rate of return, Repayment schedule...
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...banking sector developed very appreciate. The RBI also nationalized good amount of commercial banks proving socio economic services to the people of the nation. The public Sector banks have shown very good performance as far as the financial operations are concerned. The total income of the public sector banks has also shown good performance since the last few years. The public sector Banks have also shown comparatively good result. The gross profits and the net profits of the Public Sector banks have been on a high from past few years. The private sector banks are also showing good results in case of profits. However, the only problem of the Scheduled Commercial Banks these days are the increasing level of the non performing assets. The Non-Performing Assets (NPAs) problem is one of the foremost and the most formidable problems that have shaken the entire banking industry in India like an earthquake. Like a canker worm, it has been eating the banking system from within, since long. It has grown like a cancer and has infected every limb of the banking system. At macro level, NPAs have choked off the supply line of credit to the potential borrowers, thereby having a deleterious effect on capital formation and arresting the economic activity in the country. At the micro level, the unsustainable level of NPAs has eroded the profitability of banks through reduced interest income and provisioning...
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...overcome these difficulties properly in order to effectively counter the competition faced by the foreign banks. With the framing of laws as per international standards and setting up of Debt recovery tribunal we can say that steps have been taken in this direction. Banks in India have traditionally been saddled with very high Non-Performing Assets. Banks burdened with huge NPA’s faced uphill tasks in recovering then due to archaic laws and procedures. Realizing the gravity of the situation the government was quick to implement the recommendations of the Narsimham Committee leading to the enactment of the SARFAESI ACT 2002. (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act). This Act gave the banks the much needed teeth to curb the menace of NPA’s. The non performing assets (NPAs) of banks have at last begun shrinking. As reported from surveys, it is understood that there has been substantial improvements in non performing assets and this has been because of several measures such as formation of asset reconstruction companies, debt restructuring norms, securitization, provisioning norms and prudential norms for income recognition. We also give our suggestions as to how NPA retrieval can be made easy and in what way the NPA scenario is headed. The problem is no doubt about recovery management where the objective is to find out about the reasons behind NPAs and to create networks for recovery. Banks of Ahmedabad, Patan & Mehsana...
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...NON-PERFORMING ASSETSCHALLENGE TO THE PUBLIC SECTOR BANKS INTRODUCTION After liberalization the Indian banking sector developed very appreciate. The RBI also nationalized good amount of commercial banks for proving socio economic services to the people of the nation. The Public Sector Banks have shown very good performance as far as the financial operations are concerned. If we look to the glance of the financial operations, we may find that deposits of public to the Public Sector Banks have increased from 859,461.95crore to 1,079,393.81crore in 2003, the investments of the Public Sector Banks have increased from 349,107.81crore to 545,509.00crore, and however the advances have also been increased to 549,351.16crore from 414,989.36crore in 2003. The total income of the public sector banks have also shown good performance since the last few years and currently it is 128,464.40crore. The Public Sector Banks have also shown comparatively good result. The gross profits of the Public Sector Banks currently 29,715.26crore which has been doubled to the last to last year, and the net profit of the Public Sector Banks is 12,295,47crore. However, the only problem of the Public Sector Banks these days are the increasing level of the non performing assets. The non performing assets of the Public Sector Banks have been increasing regularly year by year. If we glance on the numbers of non performing assets we may come to know that in the year 1997 the NPAs were 47,300crore and reached to 80...
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...Narasimham Commitee • From the 1991 India economic crisis to its status of third largest economy in the world by 2011, India has grown significantly in terms of economic development. So has its banking sector. • During this period, recognising the evolving needs of the sector, the Finance Ministry of Government of India (GOI) set up various committees with the task of analysing India's banking sector and recommending legislation and regulations to make it more effective, competitive and efficient.[1] • Two such expert Committees were set up under the chairmanship of M. Narasimham. • They submitted their recommendations in the 1990s in reports widely known as the Narasimham Committee-I (1991) report and the Narasimham Committee-II (1998) Report. • These recommendations not only helped unleash the potential of banking in India, they are also recognised as a factor towards minimising the impact of global financial crisis starting in 2007. • Unlike the socialist-democratic era of the 1960s to 1980s, India is no longer insulated from the global economy and yet its banks survived the 2008 financial crisis relatively unscathed, a feat due in part to these Narasimham Committees. Recommendations of Narasimham committee The 1998 report of the Committee to the GOI made the following major recommendations: Autonomy in Banking Greater autonomy was proposed for the public sector banks in order for them to function with equivalent professionalism as their international counterparts...
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...NON-PERFORMING ASSET An asset becomes non-performing when it ceases to generate income for the bank or financial institution. In the past RBI had sets guidelines for an asset to be classified as an NPA. An asset was considered as non-performing asset based on the concept of Past Due; a credit in respect of which interest/instalment of principal remained past due for a specific period of time. The specific period was reduced in a phased manner. An amount was considered as past due if it remained outstanding for 30 days beyond the due date. Starting from April 2001, the past due concept was removed and the period to be reckoned for calculation of non-payment started from the due date of payment. From the financial year 2003-04, in order to move towards international best practices, the RBI adopted the 90-days-overdue norms for identification of NPAs. With effect from March 31, 2004, a non-performing asset has been defined as a loan or an advance where:- * Interest/instalment of principal remains overdue for a period of more than 90 days in respect of a Term Loan * The account remains Out of order for a period of more than 90 days, in respect of an Overdraft / Cash Credit facility * The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted * In the case of direct agricultural advances, an annexure Annex 1 lists the types of advances which are to be treated in a special way as advised in the overdue norm. Agricultural...
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...n Management of Non Performing Assets σ Abstract - In India the magnitude of the problem of bad debts was not taken seriously. Subsequently, following 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. There is also no consistency in the application of NPA norms, ever since these have been recognized. Non Performing Assets are also called as Non Performing Loans. It is made by a bank or finance company on which repayments or interest payments are not being made on time. A loan is an asset for a bank as the interest payments and the repayment of the principal create a stream of cash flows. It is from the interest payments that a bank makes its profits. The problem of NPA is not limited to only Indian public sector banks, but it prevails in the entire banking industry. Major portion of bad debts in Indian Banks arose out of lending to the priority sector at the dictates of politicians and bureaucrats. If only banks had monitored their loans effectively, the bad debt problem could have been contained if not eliminated. The top management of the banks was forced by politicians and bureaucrats to throw good money...
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...Rising lending rates will also make the existing loans costly and thus adds to the pressure on the borrowers’ ability to service the debt. These accumulated debt leads to the massive NPA issue in nationalized banks in India. Net Worth relation with NPAs Net worth gets depleted by annual operating losses or a substantial decrease in asset values relative to liabilities. Banks are required to categorize non-performing assets further into three units on the period for which the asset has remained non-performing and the reliability of the dues: (i) Sub-standard Assets, (ii) Doubtful Assets, and (iii) Loss Assets. According to RBI directives, all banks are required to maintain NPAs both on gross and net basis. It is usually expressed in percentage term. NPAs= [(Gross or Net NPAs) / Total Advances]*100. NPA’s Relation with Capital Adequacy Ratio(CRAR) Capital adequacy ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world. Correlation Analysis is one of the major objectives of the financial reform agenda was to securitization of the banking capitals by means of capital adequacy norms so that the magnitudes of NPA as a proportion to total deposit (NPA/D) will fall and as a result of that the overall C-D(Credit to deposit) ratio will rise.High level of CRAR to provide sufficient cushion for any unexpected losses, in relation to capital adequacy requirements. NPA’s Relation with efficiency Lack of operational efficiency...
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...RECOVERY OF NPA STATUS AND CHALLENGES IN THE INDIAN BANKING SYSTEM EXECUTIVE SUMMARY: Non-performing Assets means a loan which has been classified by a bank or financial institution as substandard or loss assets. According to this default status would be given to borrower if the dues are not paid for 90 days. Asset Classification: * Standard: are the ones in which the bank is receiving interest as well as the principal amount of the loan regularly from the customer. If asset fails to be in this category i.e. amount due more than 90 days then it is NPA and NPAs are further need to be classified in sub categories. i) Sub-standard: the account holder comes in this category when they don’t pay three instalments continuously after 90 days and up to 1 year; ii) doubtful NPA; iii) Loss Assets: under this 100% provision is made. When account holder comes in this category their account can be written off by the banks. Types of NPA: * Gross NPA: reflects the quality of the loan made by the banks. * Net NPA: reflects the actual burden of the banks. The main reason behind NPA would be lack of proper enquiry by the bank, wilful defaulter, change in government policies etc. which could affect the bank by restriction on flow of cash by the bank for sanctioning a loan, drain of profit, bad affects on goodwill, etc. There are different acts and institution for the NPA recovery like SARFAESI ACT, 2002; SARC; ARC; DRT; Lokadalats; etc. Current...
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...Non-Performing Assets (NPA) - Meaning Non-Performing Assets are popularly known as NPA. Commercial Banksassets are of various types. All those assets which generate periodical income are called as Performing Assets (PA). While all those assets which do not generate periodical income are called asNon-Performing Assets (NPA). If the customers do not repay principal amount and interest for a certain period of time then such loans become non-performing assets (NPA). Thus non-performing assets are basically non-performing loans. In India, the time frame given for classifying the asset as NPA is 180 days as compared to 45 days to 90 days of international norms India and Non-Performing Assets In India, NPA were very high in the beginning of 90's. Over a period of time there is considerable decline in the NPA's of all banks. In the case of public sector banks, gross non-performing assets were 9.4% in 2002-03 and it declined to 7.8% in 2003-04. The net NPA during the same period declined from 4.5% to 3%. Types of NPA NPA have been divided or classified into following four types:- 1. Standard Assets : A standard asset is a performing asset. Standard assets generate continuous income and repayments as and when they fall due. Such assets carry a normal risk and are not NPA in the real sense. So, no special provisions are required for Standard Assets. 2. Sub-Standard Assets : All those assets (loans and advances) which are considered as non-performing for a period of 12...
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...days (new norms with effect from 31st March, 2004). Ninety days overdue - With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, from the year ending March 31, 2004. Accordingly, with 1. Interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan, 2. The account remains 'out of order' for a period of more than 90 days, in respect of an Over-drat (OD) 3. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, 4. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two and half years in the case of an advance granted for agricultural purpose. NPA represent bad loans, the borrowers of which failed to satisfy their repayment obligations. Michael (2006) emphasized that NPA in loan portfolio affect operational efficiency which in turn affects profitability, liquidity and solvency position of banks. Non-Performing Assets (NPAs) of the Indian banking sector have been rising in 2011-12, reached at 2.9% from 2.4% in 2008-09. NPA represent bad loans, the borrowers of which failed to satisfy their repayment obligations. Michael (2006) emphasized that NPA in loan portfolio affect operational efficiency which in turn affects profitability, liquidity and solvency position of banks. Non-Performing...
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...capabilities and the most widely used ratios are ROA, ROE and Net Interest Margins. Liquidity measures the ability of banks to meet its anticipated and unanticipated demands for funds. Demands of funds can be in the formed of withdrawals by customers, new loan approvals and disbursement, cheque clearings and also for reserve requirement. Therefore it is important for banks to have balanced in level of short term assets and long-term assets. An example of a long-term asset is loans and advances. Loans and advances of a bank should not be growing at a drastic rate as the bigger the long-term assets the lower is its liquidity position. Assets quality is measured by analyzing the level of non-performing loans, recoveries, and adequacy of provisions. Non-performing loans (NPLs) level must be at its minimum as it can have an adverse impact on earnings capacity of banks. It must be manageable by imposing stringent requirement on loan application and applying effective tools in evaluating new loan applications. The lower the NPLs, the better is the ‘quality’ of assets. Capital adequacy is to protect interest of depositors and shareholders and banks are required to achieve a minimum capital adequacy of 8 %. From the regulators point of view it determines the stability of financial system. The higher the adequacy the better is the bank in its ability to protect depositors and...
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...Opportunities and threats to banking sector STUDY OF NON PERFORMING ASSETS WITH SPECIAL REFERENCE TO NAGPUR NAGRIK SAHAKARI BANK INTRODUCTION The accumulation of huge non-performing assets in the banks has assumed great importance. The depth of the problem of bad debts was first realized in early 1990s. Since then, the focus has shifted towards improving the quality of assets and better risk management. Non-performing assets are problematic for financial institutions since they depend on interest payments for income. It is generally felt that NPAs reduce the profitability of banks, weaken its financial health and erode its solvency. Troublesome pressure from the economy can lead to a sharp increase in non-performing loans and often in massive write-downs. A classification used by financial institutions that refer to loans that are in jeopardy of default. Once the borrower has failed to make interest or principal payments for 90 days the loan is considered to be a non-performing asset. In India, the time frame given for classifying the asset as NPA is 180 days as compared to 45 to 90 days of international norms. Types of NPA: There are two types of NPA namely Gross NPA and Net NPA. Gross NPA reflects the quality of loans made by banks, while net NPA shows the actual burden of banks. 1) Gross NPA: An advance which is considered irrecoverable for banks, for which it has made provisions, but which is still held in banks books of account. An improvement in the gross...
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...WORKING PAPER NO: 470 BASEL BANKING NORMS – A PRIMER Akshay Uday Shenoy PGP Student Indian Institute of Management Bangalore Bannerghatta Road, Bangalore – 560076 akshay.shenoy@iimb.ernet.in Yatin Balkrishna Mohane PGP Student Indian Institute of Management Bangalore Bannerghatta Road, Bangalore – 560076 yatin.mohane@iimb.ernet.in Charan Singh RBI Chair Professor Economics & Social Science Indian Institute of Management Bangalore Bannerghatta Road, Bangalore – 5600 76 Ph: 080-26993818 charansingh@iimb.ernet.in Year of Publication-October 2014 Basel Banking Norms – A Primer1 Abstract This paper aims to first build a deeper understanding of the emergence of Basel banking norms (Basel I), and the transition to each of the subsequent regulations (Basel II and Basel III). The primary purpose of developing this understanding is to further analyze the extent of effectiveness of the Basel norms. To explore how such regulations impact an economy, we have specifically looked at five economies of the world (including India), which are geographically apart, in this context. The idea here is to study how, for instance, banking institutions have shaped up to these norms – and whether the effects were favorable or adverse. We then conclude by conceptually looking at the future direction of regulations such as the Basel norms in the banking industry. Keywords: Banking, Financial Services, Regulation, Basel Norms, Capital Adequacy, Liquidity 1 The...
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...enterprises, and multinational corporations and leading small and mid-sized enterprises (“SME”). As a result, a large part of our wholesale lending is generally concentrated among highly rated customers. In addition to market targeting, the principal means of managing credit risk is the credit approval process. We have policies and procedures to evaluate the potential credit risk of a particular counterparty or transaction and to approve the transaction. For our wholesale clients, we have a risk assessment and grading system that is applied to each corporate counterparty on an annual basis. We also have limits for funded exposure to individual industries. In addition, we have limits for exposure to borrowers and groups of borrowers for funded and non-funded exposures. Our credit risk policies for loans also apply to credit substitutes. We also have a review process that ensures the proper level of review and approval depending on the size of the...
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