A Study of Non-Performing Assets of
Commercial Banks and It’s Recovery in India
The Indian banking sector is facing the serious problems of raising Non- Performing Assets (NPAs). This problem affects the profitability of banks to earn required return on their assets. One of the most important area to care about for scheduled commercial banks is level of their Non- performing assets and their increasing trends in India. The recommendations which were given by Narasimhan committee and Verma committee, that requires banks to take some steps for solving the problem of NPAs in the old balance sheets of the banks. It is matter of regret that for tackling the problem, no single bank of Indian banking system has made a systematized efforts. NPAs replicate the piece of performance of banks and a high level of NPAs suggests high prospects of having a large number of credit defaults which are affecting the profitability and net-worth of banks and also eroding the value of their as in the market as well. NPAs affect the liquidity and profitability; threaten the quality of asset and survival of banks in the long run. The trouble of NPAs is not only alarming the banks but also the whole financial system of the economy regarding the flaws in it. In detail high level of NPAs in Indian banking system is nothing but a indication of the state of health of the industry and trade. It is necessary to trim down NPAs to improve the financial health and sustainable banking system. An effort is made in this paper to understand the status and the trend of NPAs in Indian Scheduled commercial banks, The factors causing NPAs and reasons for high impact of NPAs on Scheduled commercial banks in India and recovery of NPAs through various channels.
Keywords: Non- Performing Assets, NPA, Liquidity and Profitability, Scheduled Commercial banks, Narasimhan Committee and Verma Committee.
The structure of Indian banking system have commercial banks, private banks and cooperative banks among them commercial banks have for more than 90 per cent of banking system’s assets. And among the commercial bank, there are nationalized banks in which the government has majority of banks shareholding. Another, the State Bank of India (SBI) in which majority of equity holding is with the Reserve Bank of India and the associate banks of SBI having majority holding being with State Bank of India. If we combine these banks together with regional rural banks, the whole constitute the public sector (state owned) banking system in India.
The banking industry has undergone a quantity of change after the first phase of economic liberalization in 1991. But before the phases economic reforms in 1991, there are several other measures were adopted to increase the efficiency of the banks such as nationalization of 14 banks in 1969 and again nationalization of 6 banks in 1980.
Loans and advances granted by commercial banks are highly beneficial to individuals, firms, companies and industrial concerns because the growth and diversification of business activities are effected to a large extent by bank financing, borrowing and credit facility. Banks grants Loans and advances to business enterprises for meeting their short-term and long term financial needs. Granting loans and advances for economic growth and productive purposes is the prime duty of banks.
However, the process of lending also carries a risk called credit risk, which arises from the failure of borrower for paying their dues. Non-performing Asset refers to loans that are in risk due to default on the part of the borrower. Once the borrower has failed to make interest or principal payments for 90 days, then the loan amount is considered to be a Non-performing Asset. At present, level of NPAs and their increasing trends are the major concerns for the banks. NPAs are the best indicators for the health of banking industry. NPAs replicate the piece of performance of banks and a high level of NPAs suggests high prospects of having a large number of credit defaults which are affecting the profitability and net-worth of banks and also eroding the value of their as in the market as well. And also NPAs reflects the performance of the bank because these are the primary indicators of the credit risk (Ibrahim & Thangavelu, 2014).
The banking industry in India has been witnessing a series of revolutionary changes and noteworthy transformation since 1991 after introduction of LPG policy and new economic and financial sector reforms. Liberalization aimed to free the banks with too much regulation. All this required prudential norms to be adopted by the banks. At that time, it was recognized that the banks were burdened with huge amount of NPAs which were not disclosed in the balance sheet so the banks were recommended to reveal NPAs so the actual position could be judged. It has been observed that the level of NPAs in the public sector banks are more than the private sector bank because these banks provide direct credit for priority sector projects and social development projects (Mahajan, 2014).
Narasimhan Committee consented that the identification and reduction of NPAs to be treated as a matter of national priority because NPA affects the productive resources of the banks which are blocked in the assets incurring losses for a long period of time. Profitability, liquidity and earnings of banks are affected due to increasing NPAs numbers in their balance sheet. If we take a quick look on the numbers of non-performing assets we may come to know that in the year 1995 the NPAs were Rs. 38385 crores and arrived at 71047 crores in 2011 in Public sector banks and comparatively in the year 2001 the NPAs were Rs. 6410 crores and reached to Rs. 17972 crores in 2011 in Private sector banks.
CONCEPT OF NPA
The banks have different kind of assets, such as cash in hand, balances with other banks, investment, loans and advances, fixed assets and other assets. The Non Performing Asset (NPA) concept is restricted to loans, advances and investments. As long as an asset generates the income expected from it and does not disclose any unusual risk other than normal commercial risk, it is treated as performing asset
And when it fails to generate the expected income it becomes a “Non Performing Asset”. In other words, a loan asset becomes a Non Performing Asset (NPA) when it ceases to generate income, i.e. interest, fees, commission or any other dues for the bank for more than 90 days. A NPA is an advance where payment of interest or repayment of installment on principal or both remains unpaid for a period of 90 days.
REVIEW OF LITERATURE
Singh (2011) in his study highlighted the problem of NPAs of both public and private sector bank and concluded that the extent of NPA currently high in public sector banks as compared to private sector bank. The steps taken by the govt. to reduce NPAs led to decline in NPA of Indian banking sector. But a lot of works need to be done because the extent of NPAs in foreign bank is still lower then Indian banks. Although NPAs cannot be reduced to zero but Indian banks can try to compete with private and foreign banks to maintain international standard.
Ibrahim and Thangavda (2014) in their study discussed the problem of NPAs and concluded that the NPAs have been eating the banking industry since the nationalization of banks in 1969. To bring down the level of NPAs in banks is the biggest challenges in front of Indian economy.
Mahajan (2014) in her analysis of NPAs of public private and foreign sector bank in India has concluded that the position of NPAs in improving in India showing a declining trend but NPAs of public sector bank are still higher than private sectors banks & foreign bank. Reason for this is that top management of private & foreign bank are more competent, experienced and expertise than public sector bank. So they are competent in recovering of debt. The public sector bank disburse loan to weaker section where the chance so recovering the debt is almost negligible. The NPAs of public sector banks are showing a declining trend. The credit goes to the govt. because of steps that the govt. has taken such as one time settlement, lok Adalats, Debt Recovery Tribunal and SARFAESI Act (2002) have proved right to some extent.
Malyadri, Dacha and Sirisha (2011) observed that there is increase in advances of banks however the decline in the ratio of NPAs indicates improvement in the assets quality of Indian banks. It was suggested that govt. should formulate bank specific policies and should implement these policies through RBI.
Ganeshan and Santhanakrishnan (2013) concluded that banks have undergone major changes after first phase of liberalization indicating the importance of credit management. In the recent time banks are very cautious in extended loans because of mounting NPAs. This article highlights the reason for an assets becoming NPA and remedial measures to be taken to control them. Steps of govt. have reduced the NPAs at considerable level.
Namita, et al. (2012) observe that prudential and provisioning norms and other initiatives taken by the regulatory body has pressurized bank to improve their performance and consequently result in trim down NPA as well as improvement in the financial health of the Indian Banking Industry.
Narayanan and Surya (2013) investigate the impact of NPAs on the profitability of banks. From this study it is analyzed that even though the NPA during the last five year has not increased drastically, it still remains a challenge. The recessionary pressure faced by the banking sector is a important reason for the growth of NPA. It should be managed to maintain a healthy and viable environment.