For any nation, its banking sector plays a vital role in the economic growth of a country. Through its intermediary activities, the banking sector promotes the production, distribution, exchange, and consumption processes in the economic system. It stimulates the flow of funds in the economy and fuels economic growth. The primary function of banks is to lend funds as loans to various sectors such as agriculture, industry, personal and housing, etc. and to receive deposits. Receiving a deposit involves no risk since it is the banker who owes a legal obligation to repay the deposit, whenever it’s demanded. On the other hand, lending always involves much risk because there is no certainty of repayment and this uncertainty is known as Non-Performing Assets (NPA). NPA is outlined as an advance where payment of interest or repayment of installment of principal (in case of term loans) or both remains unpaid for a certain period. So the rise of non-performing assets in the banking sector should be considered as a curse for the Indian economy.
According to the Narasimham Committee Report (1991), those assets (advances, bills discounted, overdrafts, cash credit etc.) for which the interest remains due for a period of four quarters (180 days) now it is 90 days, should be considered as NPA.
RBI issued guidelines in 1993 based on the recommendations of the Narasimham Committee that mandated identification and reduction of non-performing assets in the banking sector to be treated as ‘National Priority. The level of the NPA indicates the efficiency of banker’s credit risk management and allocation of the resource. The measures incorporate to manage NPA can be classified into precautionary measures and curative measures. Precautionary measures focus on strengthening the credit risk management system and continuous risk assessment systems of the bank. This will reduce the instances of fresh NPA that have been generated. The curative measures are reactionary in nature and focused on recovering from NPA accounts. It includes measures initiated by RBI such as setting up Asset Reconstruction Companies (ARCs), Lok Adalat, Debt Recovery Tribunals (DRTs), Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI Act 2002), Compromise Settlement Schemes, etc.
Rising Factors Of Non Performing Assets In Banking Sector
The banking sector has been facing the serious problems of the rising NPAs. The rising of NPAs are more in public sector banks when it is compared to private sector banks and foreign banks. The NPAs are growing due to external as well as internal factors.
| Internal factors | External factors |
| Absence of regular industrial visit | Change on government policies |
| Defective lending process | Directed loan system |
| Faulty credit management | Industrial recession/sickness |
| Inappropriate technology | Ineffective recovery |
| Improper SWOT analysis | Lack of demand |
| Managerial deficiencies | Natural calamities |
| Poor credit appraisal system | Willful defaults |
| Re-loaning process |
IMPACT OF NPA
NPA impacts the performance and profitability of banks. The most notable impact of NPA is the modification in banker’s sentiments which can hinder credit evolvement to productive purpose. Banks may incline towards more risk-free investments to avoid and reduce riskiness, which is not conducive to the growth of an economy. If the extent of NPAs isn’t controlled timely they will
- Higher provisioning requirement on mounting NPAs adversely affect capital adequacy ratio and banks profitability.
- NPAs affect the risk facing ability of banks.
- The cost of capital will go up.
- Reduce the earning capacity of assets and badly affect the Return on Investment (ROI).
- The assets and liability mismatch will widen.
- NPAs causes to diminish the worth of share typically even below their book value in the capital market.
NPAs AT THE GLOBAL LEVEL
In order to get a global picture, it is essential to look at the NPAs in the different countries of the world. Since the concept of NPA illuminated in India only in the post-reform era, it would be useful to look at recent figures rather than adhere to a historical account. A closer look at the Non-performing loans (NPL), as they are called in many nations, (Table 1) reveals that the globally shares in 2014 Cyprus has the highest NPL with 45.44 percent and Macao has the lowest NPL of 0.12 percent and India has the fifty-fifth rank with 4.5 percent of share in global NPLs. On the basis of Table 1, it is easier to say that India’s NPA is very low as compared to other countries but figure 1 shows the different perceptions of NPA and GDP.
TABLE 1: NON-PERFORMING LOANS AS PERCENT OF ALL BANK LOANS, 2014
| Sr. No. | Rank | Countries | Share in Global (percent) |
| 0 | 1 | 2 | 3 |
| 1 | 1 | Cyprus | 45.44 |
| 2 | 2 | Greece | 34.25 |
| 3 | 3 | Sierra Leone | 33.80 |
| 4 | 4 | Yemen | 24.70 |
| 5 | 5 | Kazakhstan | 23.55 |
| 6 | 6 | Serbia | 23.00 |
| 7 | 7 | Albania | 22.80 |
| 8 | 8 | Tajikistan | 21.21 |
| 9 | 9 | Ukraine | 18.98 |
| 10 | 10 | Ireland | 18.73 |
| 11 | 55 | India | 4.35 |
| 12 | 109 | Macao | 0.12 |
Source: The Global Economy
GROSS GDP vs GROSS NPA IN INDIA
On the basis of Table 1 it can be said that in comparison to other countries, India is far better than other countries but in reality shows in figure 1. In this figure, we can see that NPA was declined between 2002 to 2011 but after that, it has been increasing and reached the level of 4.5 approximately in 2014. In this year, the GDP is also standing around 5 percent. Now it is easier to say that non-performing assets will be approximately equal to GDP and if it will not mitigate the NPAs will cross our GDP.
NON-PERFORMING ASSETS IN INDIAN SCHEDULED COMMERCIAL BANKS
An analysis of Gross NPAs in SCBs, Table 2 depicts a number of Gross Advances, Gross NPA, and the percentage of Gross NPA during the period of 2004-05 to 2014-15. The number of gross advances has increased from ₹ 11,526.82 crores in 2004-05 to ₹ 75,606.65 crores in 2014-15. The amount of gross NPA has increased from ₹ 593.73 crores in 2004-05 to ₹ 3,229.16 crores in 2014-15. Similarly, the percentage of NPA in 2004-05 was 5.2 %. After 2005, it has declined and reached the minimum level of 2.3 % in 2007-09. After the recession period, it shows a rising trend and reached the level of 4.2% in 2014-15. In the last ten year, the study of NPA is showing the increasing trend of NPA.
Table 2: GROSS AND NET NPAs OF SCHEDULED COMMERCIAL BANKS (Amount in rupees crores)
| Year | Advances | Non Performing Assets (NPAs) | ||||
| Gross | Net | Gross (Amount) | Net (Amount) | Gross (%) | Net (%) | |
| 0 | 1 | 2 | 3 | 4 | 5 | 6 |
| 2004-05 | 11526.82 | 11156.63 | 593.73 | 217.54 | 5.2 | 2.0 |
| 2005 -06 | 15513.78 | 15168.11 | 510.97 | 185.43 | 3.3 | 1.2 |
| 2006-07 | 20125.10 | 19812.37 | 504.86 | 201.01 | 2.5 | 1.0 |
| 2007-08 | 25078.85 | 24769.36 | 563.09 | 247.30 | 2.3 | 1.0 |
| 2008-09 | 30382.54 | 29999.24 | 683.28 | 315.64 | 2.3 | 1.1 |
| 2009-10 | 35449.65 | 34970.92 | 846.98 | 387.23 | 2.4 | 1.1 |
| 2010-11 | 40120.79 | 42987.04 | 979.00 | 417.00 | 2.5 | 1.1 |
| 2011-12 | 46655.44 | 50735.59 | 1370.96 | 652.00 | 2.9 | 1.3 |
| 2012-13 | 59882.79 | 58797.03 | 1931.94 | 986.00 | 3.2 | 1.7 |
| 2013-14 | 68757.48 | 67352.32 | 2641.95 | 1426.57 | 3.8 | 2.1 |
| 2014-15 | 75606.65 | 72391.26 | 3229.16 | 1760.93 | 4.2 | 2.4 |
Source: RBI
As the gross NPAs analysis, the above Table 2 also shows a number of Net Advances, Net NPA, and the percentage of Net NPA during the period of 2004-05 to 2014-15. The number of advances has increased from ₹ 11,156.63 crores in 2004-05 to 72,391.26 crores in 2014-15. Further, the amount of NPA has also increased from ₹ 217.54 crores to ₹ 1,760.93 crores during the period of 2004-05 to 2014-15. The percentage of Net NPA in 2004-05 was 2.0 percent, it has declined below 2.0 percent in the next eight years but gradually it has increased and reached the level of 2.4 percent in 2014-15.
The above figure 2 shows the trend of Gross NPA and Net NPA in crores for the period of 11 years starting from 2004-05 to 2014-15. We can observe here that the Gross and Net amount of NPAs has been continuously increasing year by year. The above figure 3 portrays the trend of Gross NPA and Net NPA in percentages for the period of 11 years i.e. from 2004-05 to 2014-15. We can observe here that the Gross and Net percentage of NPA has been showing a normal trend between 2006-11 but after that, it is showing the increasing trend.
RECOVERY OF NPA
Using the assorted choices by banks and financial institutions they accelerated their recovery of NPAs. The NPAs recovered by scheduled commercial banks through various channels is presented in Table 3. In Between 2005-15, the total cases referred to various institutions were 1,73,42,217 which were worth about ₹ 1,44,260 crores. Out of this, around ₹ 46,018 crores was recovered. In terms of cases, the highest number (1,48,28,467) was referred to the Lok Adalat and the lowest (2,63,073) to the DRTs.
TABLE 3: NPAs RECOVERED BY SCBs THROUGH VARIOUS CHANNELS
(Amount in Rs. Crores)
| Year | Sr. No. | Recovery Channels | Lok Adalats | DRTs | SARFAESI Act | Total |
| 0 | 1 | 2 | 3 | 4 | 5 | 6 |
| 2010 -11 | 1 | No. of cases referred | 616018 | 12872 | 118642 | 747532 |
| 2 | Amount involved | 53 | 141 | 306 | 500 | |
| 3 | Amount recovered* | 2 | 39 | 116 | 157 | |
| 4 | 3 as a percent of 2 | 3.7 | 27.6 | 37.9 | 31.4 | |
| 2011-12 | 1 | No. of cases referred | 476073 | 13365 | 140991 | 630429 |
| 2 | Amount involved | 17 | 241 | 353 | 611 | |
| 3 | Amount recovered* | 2 | 41 | 101 | 144 | |
| 4 | 3 as a percent of 2 | 11.8 | 17.0 | 28.6 | 23.6 | |
| 2012-13 | 1 | No. of cases referred | 840691 | 13408 | 190537 | 1044636 |
| 2 | Amount involved | 66 | 310 | 681 | 1057 | |
| 3 | Amount recovered* | 4 | 44 | 185 | 233 | |
| 4 | 3 as a percent of 2 | 6.1 | 14.1 | 27.1 | 21.9 | |
| 2013-14 | 1 | No. of cases referred | 1636957 | 28258 | 194707 | 1859922 |
| 2 | Amount involved | 232 | 553 | 953 | 1738 | |
| 3 | Amount recovered* | 14 | 53 | 253 | 320 | |
| 4 | 3 as a percent of 2 | 6.2 | 9.5 | 26.6 | 18.4 | |
| 2014-15 | 1 | No. of cases referred | 9131199 | 171113 | 1241086 | 10543398 |
| 2 | Amount involved | 887 | 3789 | 4705 | 9381 | |
| 3 | Amount recovered* | 43 | 531 | 1152 | 1726 | |
| 4 | 3 as a percent of 2 | 4.8 | 14 | 24.5 | 18.4 |
Note: * Refers to the amount recovered during the given year, which could be with reference to cases referred during the given year as well as during the earlier years.
On the basis of Table 3, the amount involved in between 2005-15, SARFAESI Act has the highest amount of ₹ 71,736 crores while Lok Adalats have the least around ₹ 18,358 crores. In terms of percentage, the involvement of amount through Lok Adalats, DRTs, and SARFAESI Act was 13, 38, and 49 percent respectively. In terms of the recovery of NPAs through the SARFAESI Act, the highest percentage has recovered which was 52 percent while Lok Adalats recovered only 2 percent.
A well-developed banking system is a sine qua non for the economic development of a country.
The strength of the economy is closely related to the reliability of its banking system. If NPAs aren’t properly managed, it will cause monetary and economic degradation which in turn hampers the investment climate which is a crucial source looking to the present state of our economy. A banker may persistently monitor the receiver in order to confirm that the amount sanctioned is employed properly for the cause for which it has been sanctioned. The banker should get both the formal and informal reports about the goodwill of the customer. If he had already evidenced a defaulter then there’s no absolute confidence of enabling loan to him. The banker also has to educate the borrowers regarding the effects and consequences of default. By considering all the above factors the banker may scale back the non-performing assets in a bank. It is highly impossible to have zero percentage NPAs but at least Indian banks can try to minimize it. Hence, the problem of non-performing assets in the banking sector desires several serious efforts otherwise NPAs will keep killing the profitability of banks which is not good for the growing Indian economy at all.
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