1. other factors) by borrowers. In other words,




























1. Introduction

Banking System in India is more accessible today due to
a wide network of private, public as well as foreign banks. These commercial
banks have contributed to the growth of Indian economy significantly. They help
in mobilization of idle, excess funds towards productive purposes and this
serves as capital for various industries. However, there have been rising
concerns among these market facilitators in past few decades due to high credit
risk as money lenders and reduced lending ability due to wilful default (among
other factors) by borrowers. In other words, the problem of Non-performing
Assets is inevitably burdening the banking sector.

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The primary purpose of a bank is to accept deposits and
lend to borrowers. Thus, a continuous credit cycle is to be maintained and
credit risk to be minimized. Also, provision for defaults have to be kept under
control as it affects the bank’s profitability as that portion is to be kept
aside in case a probable default occurs. An asset (extended loan/ advance)
becomes a Non-performing asset on the balance sheets of banks/ financial
institutions if a period of 90 days has elapsed and the borrower has not made
the necessary interest/ principal payments. In such a scenario, all other
advances to that borrower also become Non-performing, irrespective of any
likelihood of few of such advances to be recovered. With stressed assets of around
12% out of total loans extended by banks, India has NPAs more than the GDP of
137 economies.

Many steps have been taken by policymakers to reduce
NPAs and boost the performance of banks in India. Bank Recapitalization, Debt
recovery Tribunals etc. are some new initiatives apart from amendments in the
existing acts/ set ups such as Insolvency and Bankruptcy code, Basel Norms, SARFAESI
and RDDBFI. Thus, a detailed diagnosis of NPAs in commercial banking sector of
India needs to be done in the light of above policy changes.


2. Banking
Sector in India

Banking in India is as old as Vedic Period. It has been carried out by indigenous bankers during
origin, agency houses under the regime of East India Company until the SBI Act
was passed in 1955. Reserve Bank of India (RBI) was setup in 1935 with one of
its main objectives to supervise the financial institutions in India. Further,
Banking Regulations Act was passed in 1949 which granted more autonomy to RBI
and gave Indian banking system a proper structure. Since then, commercial banks
in India have been regulated by RBI. The current structure of Commercial banks
in India is as follows:

28 Public Sector Banks

34 Private Sector Banks

43 Foreign Banks

Among these, State Bank of India, a public sector bank,
is the biggest bank with 8 subsidiary banks under its ambit. From around 8270
branches in 1969, banking in India has progressed enough to have over 49,000
branches in rural India. With this, over 90% households today have access to
formal banking. Many reforms have been passed over past few decades to ensure
balance sheets reflect true financial well-being of respective banks. It
included income recognition measures, capital adequacy norms, provisioning, asset
classification etc.


3. Concept
of NPAs

As per RBI, a Non-performing asset is “a credit facility in respect of which the
interest and/ or instalment of principal has remained ‘past due’ for a period
of 90 days.”

The balance sheet of banks have NPAs restricted to
loans, advances and investments. Thus, when such assets stop generating any
income for banks and their recovery seems doubtful/ unlikely – this turns such
assets to non-performing. This has a direct impact on the banks’ liquidity,
profitability and equity. NPAs, beyond a certain level, become a concern for
stakeholders. Not just lenders, even the policy makers are bothered as banking
is directly related to economic growth- which is the responsibility of
economists and government.


4. Classification
of Assets

NPAs can be classified into four categories:

Assets: These are performing assets (loans and advances) which
generate continuous interest income and principal repayments as and when they the
due date falls. Such assets usually carry a normal and acceptable level of risk
and are not Non Performing Assets in actual sense

Assets : These are the assets which are said to be
non-performing for a period of 12 months

Assets: These are the assets which are said to be non-performing
for a period of more than 12 months

Assets: These are the assets which are almost impossible to
recover. These assets are identified on a bank’s balance sheet by the Auditors
or Reserve Bank of India.

5. Types of NPA


Gross NPAs are sum total of all the assets (loans and
advances) which are classified as NPAs according to the guidelines of RBI, as
on the date of Balance Sheet. Gross NPAs depict the quality of the loans and
advances extended by Commercial banks. It comprises of all non-standard assets such
as sub-standard, doubtful or loss assets.

It is computed as follows:

NPAs Ratio    =      Gross




Net NPAs are the kind of NPAs wherein the banks deduct
the provisions created for NPAs. Net NPA depict the actual burden of banks. Provisions
are very significant for bank NPAs in countries like India. This is because the
bank balance sheets are burdened with large amount of NPAs and further, the
process for recovery and writing off the loans is very complex as well as time
consuming. This is the reason for a very high difference between gross and net

Net NPA is computed as follows:

NPAs    =            Gross NPAs – Provisions

Advances – Provisions INCOME


6. Current Scenario of NPAs in India

As of June 2016, the aggregate sum of Gross Non-Performing
Assets (NPAs) for public and private area banks is around Rs. 6 lakh crore. The
measure of top 20 Non Performing Assets (NPAs) records of Public Sector Banks
remains at Rs. 1.54 lakh crores. In absolute numbers, State Bank of India grapels
with the highest amount of Gross Non-performing assets at around Rs. 93,000 cr.
Punjab National Bank (Rs. 55,000 cr.) and Bank of India (Rs. 44,000 cr.) follow.

Indian foreign Banks admission most noticeably awful,
having the most astounding proportion of NPA to total advances — 20.26%. UCO
Bank (18.66%) and Bank of India (16.01%) follow.

Gross NPAs have risen significantly in past 2 years and
the trend is visible as follows:


(Rs crore)





















Not only this, it has reached an all time high of about
16.6% in Q1 OF FY’18 from Rs 829,338 cr. as on June’17.

7. Reasons for NPAs

It takes sufficient time for an asset to become non-performing.
It provides enough room and opportunity for a banker to comprehend those
symptoms/ signals by understanding the reason behind such a failure on part of borrower.
Such factors can be internal to the specific business/ company of borrower or
even bank’s operations as well as external environment related. Here are the


lender related: Poor credit Appraisal implementation,
ineffective monitoring or improper SWOT analysis on the part of banks


Inefficient management

Diversion of funds for Expansion/ modernization/

Strained labour relations

Taking up new projects

Time/ cost overrun during the project

Inappropriate technology/ technical
problems/ Product obsolescence etc.

Helping/ promoting/ associate concerns


Manipulations by debtors using their political
influence – big cause for high commercial bad debts

To over management tardiness in recovering
loan extended to big corporate house as many as 7000 wilful defaulters

time consuming and slow legal recourse available
to the lenders

Recession and economic downturns

Foreign exchange rate fluctuation and risks

Price escalation

Changes in government policy such as excise
duties, import and export levies, pollution control order etc.

Input or power shortages

Political tools such as Directed credit to
SSI and Rural sector

Absence of regular industrial visits by
borrowers leading to gradual reduction of liquidity and units start failing up
to honour its obligations for the loan payments


Following are the reasons pointed out in Economic
Survey carried out in 2012-13 which lead to increase in NPAs:

lower growth rate of the economy

uncalculated and aggressive lending by
banks in the recent years especially during profitable years

Rising interest rates (done by policymakers
to ensure appropriate money supply in the economy)

prevailing macro – economic conditions of
the economy

switchover to an electronic system based identification
of Non-performing assets by public sector banks




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