In liberalizing economy banking and financial sector get high priority. Indian banking sector of having a serious problem due non performing. The financial reforms have helped largely to clean NPA was around Rs. 52,000 crores in the year 2004. The earning capacity and profitability of the bank are highly affected due to this
NPA is defined as an advance for which interest or repayment of principal or both remain out standing for a period of more than two quarters. The level of NPA act as an indicator showing the bankers credit risks and efficiency of allocation of resource.
Various studies have been conducted to analysis the reasons for NPA. What ever may be complete elimination of NPA is impossible. The reasons may be widely classified in two:
(1) Over hang component
(2) Incremental component
Over hang component is due to the environment reasons, business cycle etc.
Incremental component may be due to internal bank management, credit policy, terms of credit etc.
Asset Classification :
The RBI has issued guidelines to banks for classification of assets into four categories.
1. Standard assets:
These are loans which do not have any problem are less risk.
2. Substandard assets:
These are assets which come under the category of NPA for a period of less then 12 months.
3. Doubtful assets:
These are NPA exceeding 12 months
4. Loss assets:
These NPA which are identified as unreliable by internal inspector of bank or auditors or by RBI.
The classification of assets of scheduled commercial bank.
Table 1 (Amount Rs. crores)
Sub standard assets
Income recognition and provisioning
Income from NPA is not recognized on accrued basic but is booked as income only when, it is actually received. RBI has also tightened red the provisions norms against asset classification. It ranges from 0.25% to 100% from standard asset to loss asset respectively.
Gross and net NPA of different sector of bank
Table 2 (end of March 31) (in %)
Gross NPA/ Gross Advance
Public sector bank
Table 3 (end of March 31) (in %)
Net NPA / Net Advance
Public sector bank
The table II and III shows that the percentage of gross NPA/ gross advance and net NPA/ net advance are in a decreasing trend. This shows the sign of efficiency in public and private sector bamks.but still if compared to foreign banks Indian private sector and public sector banks have a higher NPA.
Management of NPA
The table II&III shows that during initial sage the percentage of NPA was higher. This was due to show ineffective recovery of bank credit, lacuna in credit recovery system, inadequate legal provision etc. Various steps have been taken by the government to recover and reduce NPAs. Some of them are.
1. One time settlement / compromise scheme
2. Lok adalats
3. Debt Recovery Tribunals
4. Securitization and reconstruction of financial assets and enforcement of Security Interest Act 2002.
5. Corporate Reconstruction Companies
6. credit information on defaulters and role of credit information bureaus
The Indian banking sector is facing a serious problem of NPA. The extent of NPA is comparatively higher in public sectors banks. (Table II&III). To improve the efficiency and profitability, the NPA has to be scheduled. Various steps have been taken by government to reduce the NPA. It is highly impossible to have zero percentage NPA. But at least Indian banks can try competing with foreign banks to maintain international standard.