Research Journal of Social Sciences, 3: 4-12, 2008

© 2008, INSInet Publications

Are non - Performing Assets Gloomy or Greedy from Indian Perspective?

1
M. Karunakar, 2Mrs. K.Vasuki and 3Mr. S. Saravanan

1
Reader and Head, Department of Business Administration, Sir Theagaraya College,
Chennai- 600 021, TamilNadu, India.
2
Senior Lecturer in Commerce, Sir Theagaraya College, Chennai- 600 021, TamilNadu, India.
3
Lecturer in Economics, Sir Theagaraya College, Chennai- 600 021, TamilNadu, India.

Abstract: The economic reforms initiated by the then finance minister and present prime minister of India
Dr. Manmohan Singh would have been remained incomplete without the overhaul of Indian banking
sector. The important aspect of norms and guidelines for making the whole sector vibrant and competitive.
The problem of losses and lower profitability of Non-Performing Assets (NPA) and liability mismatch in
banks and financial sector depend on how various risks are managed in their business. An attempt is made
in the paper that what is NPA? The factors contributing to NPA, the magnitude of NPA, reasons for high
NPA and their impact on Indian banking operations. Besides capital to risk weightage assets ratio of
public sector banks, management of credit risk and measures to control the menace of NPAs are also
discussed. The lasting solution to the problem of NPAs can be achieved only with proper credit
assessment and risk management mechanism. It is better to avoid NPAs at the market stage of credit
consolidation by putting in place of rigourous and appropriate credit appraisal mechanisms.

Key words: NPA, Factor contributing NPA, Magnitude and Consequences, Recovery methods, Capital
adequacy ratio.

INTRODUCTION d e p o s it a n d le n d ing s pe c trum s a t p re se n t .

The economic reforms initiated in 1991 by the then
Finance minister and present Prime Minister Dr.
M anmohan Singh would have been remained
incomplete without the overhaul of the Indian banking
sector. T he Narasimham committee report (First
report) recommendations are the basis for initiation of
the process, which is still continuing, though many of
the sick banks are able to come out of the red after
repeated doses of fund infusion. But a few of the
banks are still in the red and efforts are on to
resuscitate them. The bigger challenge at the moment
is to deal with the worsening financial health of the
banking sector. The important financial institutions
like Industrial Finance Corporation of India (IFCI) and
Industrial Development Bank of India (IDBI) are also
not in the pink of health, which require government
support for revitalizing themselves. The important
aspect of the banking sector reforms is relating to
liberalization of norms and guidelines for making the
whole sector vibrant and competitive.
This was a gradual process undertaken with utmost
care and least it should disrupt the banking sector.
Slowly the Reserve Bank of India (RBI) has freed the
interest rate, but marginally increased now, both on the
Simultaneously it has relaxed the Cash Reserve Ratio
(CRR) and Statutory Liquidity Ratio (SLR) and also
unlocking more and more funds in the financial
markets. On the deposit side, the bank is free to offer
any rate of interest depending upon their asset –
liability position. But the RBI regulates the savings
rate. Similarly the banks can charge the flexible rate
on lending operations depending upon their risk
perception. It is futile to say that there are no controls
but they are much lesser as compared to the controls
that was existed before the initiation of banking
reforms.
The other vibrant dimension of the banking sector
is to reduce the Non – performing assets (NPA).
During 1980 to 1996, there was a crisis in the
banking sector W orld over. According to a study 73
percent of the member countries of the International
Monetary Fund (IMF) have experienced serious
banking problems but most of these member countries
are developing nations only. One of the prominent
reasons for the crisis is building up of Non -
Performing Assets in the banking and financial sector.
India has also experienced the problem of raising NPA.
Apart from compromise on object credit assessment of
borrowers due to political economy considerations,

Corresponding Author: M. Karunakar, Reader and Head, Department of Business Administration, Sir Theagaraya College,
Chennai- 600 021, TamilNadu, India.

4
 Res. J. Soc. Sci., 3: 4-12, 2008
laxities in legal system, accounting disclosure practices,
recession and willful default have lead to the
accumulation of NPA.
Growth and Structural Changes in Banking Sector:
In order to have proper understanding of NPA menace,
it is necessary to have brief idea of growth and
structural changes that have taken place in the banking
sector. The growth of the banking business can be
assessed in five phases.
C Preliminary phase: Series of births and deaths of
banks in the first five decades of twentieth
Century.
C Business phase: Laying of solid and sound
foundation for banking business which was taken
place between 1949 and 1969 by enacting Banking
Companies’ Regulation Act 1949.
C Branching out phase (1969 to 1985): W hen 19
major commercial banks were nationalized in two
phases and these banks have reached larger mass
of population through opening of branches and
lead bank schemes.
C Consolidation phase: During this phase (1985 –
1991) weaknesses and defects of mass branching
were identified and attended through various
committees’ investigation.
C Reforms and strengthening stage (1991 to till
date): Infact first dose of reforms started
with Narasimham Committee report in 1991.
Summary of the guidelines are given below:
Loans and Advances Guidelines applicable
From 31.3.2001
Term loan interest/ installment 180 days
remains overdue for more than
Overdraft / cash credit a/c Remains out of order (!)
Bills purchased and discounted 180 days
remains overdue for more than
Agricultural loan interest / interest Two harvest seasons but not
remains overdue for more than exceeding two and half year
Other accounts – Any account to 180 days
be received remains overdue for more than
The NPA were to be reckoned on past due basis
prior to 31.3.2001. As per the guidelines if the amount
remained past due for more than two quarters it is
treated as NPA. W hen the advance remains
outstanding for 30 days beyond the due date it is past
due as per RBI classification issued in December
1992. (!) Out of order means outstanding balance
in the overdraft / cash credit account which remains
continuously in excess of the sanctioned limit for
6 months. If the outstanding balance in principal
5
Subsequently there were series of reforms in SLR,
CRR, new norms of assets classification (NPA) and
provisioning of capital adequacy norms, permission for
entry of new generation of private banks and foreign
banks regulation of interest rate, setting up of Debt
Recovery Tribunals and passage of Securitization And
Reconstruction of Financial Assets and Enforcement of
Security Interest Act (SARFAESI) 2002.
Banking Risks: The problem of losses or lower
profitability of NPAs, assets and liability mismatch in
banks and financial sector depend on how the
following risks are managed in their businesses. (a)
Credit risk (b) Interest rate risk (c) Exchange rate risk
(d) Liquidity risk (e) Transfer risk (f) Operational risk
(g) M arket risk (h) Settlement risk (i) Counter party
risk and (j) Country risks.
W hat is NPA?: Banking businesses is mainly that
of borrowing from the public and lending it to
the needy persons and business at a premium.
Lending of money involves a credit risk. W hen
the loans and advances made by banks or
financial institutions turnout as non - productive,
non-rewarding and non - remunerative then they
will become Non – Performing Assets (NPA).
According to SARFAESI 2002. NPA is an asset or
account of a borrower, which is classified by a bank or
financial institution as sub-standard asset, doubtful asset
and loss asset .
Guidelines applicable
From 31.3.2002
90 days
Remains out of order
90 days
Two harvest seasons but not
exceeding two and half years
90 days
Over draft and Cash credit is less than the
sanctioned limit but there is no credit balance for
6 months or balance is not enough to cover
interest debited for the period, then such account is
also to be taken as out of order. Over the years the
criteria for NPA regulations have become stricter.
RBI reports said that these stricter guidelines are issued
for improvements in the payment and settlement
systems, recovery climate and up gradation of
technology in the banking system.
 Res. J. Soc. Sci., 3: 4-12, 2008
Factors Contributing NPAs: The factors contributing
to NPAs are:
C D iversificatio n o f funds for expansion,
modernization undertaking of new projects and
also for helping associate concerns. This is
coupled with recessionary trends and failure to tap
required funds in the capital and debt market.
C Business (Product, marketing, financial) failure,
inefficient management, strained labor relations,
inappropriate technology, outmoded machinery,
technical problems and product obsolescence.
C Recession, input and power shortage, price
escalation, accidents, natural calamities, external
problems in other countries leading to non –
payment of over dues.
C Time and cost over run during project
implementation stage.
C Government policies like changes in excise duties,
pollution control, poor credit decisions, priority
sector lending and outdated legal systems.
C W illful default, siphoning off funds, fraud and
misappropriation by promoters and directors
dispute.
C Deficiencies on the part of banks like delay in
release of funds and delay in release of subsidies
by government.
C Delay in finalization of rehabilitation package by
the board of Industrial and Reconstruction (BIFR).
C Absence of written policies.
C The absence of portfolio concentration limits, poor
industry analysis, cursory financial analysis of
borrowers.
C Inadequate customers contract
C Excessive reliance on collateral, absence of follow
up action by banks, poor control on loan
documentation.
C Absence of asset classification and loan loss
provisioning standards and
C The lack of co-ordination between the financial
institutions and commercial banks, which provide
long-term needs of industry that, enables the
industry to misuse the funds.
M agnitude of NPAs in India: A glance through the
statistics on the movement of NPAs of public sector
banks will help to understand the extent to which they
are standing with regard to NPAs is shown below
The analysis of the above table gives a clear
crystal picture about the NPAs in public sector banks.
Since introduction of prudential norms in 1992 – 93,
the gross NPAs are to the tune of Rs. 39253 crores in
1992 – 93 is increased to Rs. 51816 crores in
2005 -06. The net NPA has also moved up from
Rs. 19691 crores in 93 – 94 to 18529 crores in
6
2005 - 2006. The magnitude of gross NPAs and net
NPAs have sliding down from 23.18% in 1992 –93
to 3.3% in 2005 – 2006whereas the net NPAs has
gone down to 1.2% from 14.46% for the same
period. It is to be treated as a serious crisis in
view of its mounting NPAs in absolute terms.
The high level of NPAs in banks is a matter of
grave concern to the public as well as to government
since the bank credit is a catalyst to the economic
development of the country and any bottleneck in
the smooth flow of credit due to the mounting NPAs
is bound to create an adverse repercussion for the
economy of the country however the magnitude of
direction is in descending order which shows
government and banks are taking corrective measures
to contain NPAs.
Indian B anking Industry Saddled with High NPAS
– The Reasons: The liberalization policies launched in
1991 opened the doors to the entrepreneurs to setup
industries and business, which are largely financed by
loans from the Indian banking systems. There is a
shakeout with many businesses are failing and loans
have become bad. In the global economy prevailing
today, the vulnerability of Indian businesses has
increased. A culture change is crept in where
repayment of bank loans is no longer assured. A
constant follow up action and vigil are to be exercised
by the operating staff. Diversion of funds and willful
default has become more common. As per a study
published in the RBI bulletin in July 1999, diversion of
funds and willful default are found to be the major
contributing factors for NPAs in public and private
sector banks.
Today, the situation looks optimistic with the
industry succeeding in overcoming the hurdles faced
earlier. The timely restructuring and rehabilitation
measures have helped to overcome setbacks and
hiccups without seriously jeopardizing their future.
The greater transparency and stricter corporate
governance methods have significantly raise the
credibility of the corporate sector. The attrition rate in
corporate sector has come down. The challenges before
the banks in India today are the raising NPAs in the
retail sector, propelled by high consumerism and
lowering of moral standards.
Impact of NPAs on Banking Operations: The
efficiency of a bank is not reflected only by the size of
its balance sheet but also the level of return on its
assets. The NPAs do not generate interest income for
banks but at the same time banks are required to
provide provisions for NPAs from their current profits.
The NPAs have deleterious impact on the return on
assets in the following ways.
 Res. J. Soc. Sci., 3: 4-12, 2008
C The interest income of banks will fall and it is to
be accounted only on receipt basis.
C Banks profitability is affected adversely because of
the providing of doubtful debts and consequent to
writing it off as bad debts.
C Return on investments (ROI) is reduced.
C The capital adequacy ratio is disturbed as NPAs
are entering into its calculation.
C The cost of capital will go up.
C The assets and liability mismatch will widen.
C The economic value addition (EVA) by banks gets
upset because EVA is equal to the net operating
profit minus cost of capital and
C It limits recycling of the funds.
It is due to above factors the public sector banks
are faced with bulging NPAs which results in lower
income and higher provisioning for doubtful debts and
it will make a dent in their profit margin. In this
context of crippling effect on banks operation the slew
asset quality is placed as one of the most important
parameters in the measurement of banks performance
under the Camel’s supervisory rating system of RBI.
Capital A dequacy Ratio of Public Sector Banks: The
capital adequacy ratio reveals the health of a bank.
The public sector banks are required to attain the
stipulated eight percent capital adequacy ratios. The
capital adequacy ratio is defined as the ratio between
the total banks capital and its risk-weighted assets. As
a part of the financial sector reforms the RBI has
introduced the capital adequacy norms in April 1992 to
encourage banks to be more risk sensitivity against
both on and off balance sheet exposures. Under the
prevailing system, except the government generated
loans the most of the advances carry 100 percent risk
weightages. According to the norms all claims on
banks are assigned a risk weightage of 20 percent.
W ith regard to off balance sheet items guarantees
issued by the banks against the counter guarantee of
other banks and discounting of documentary bills
accepted by other banks are to the treated as claims on
banks and carry a risk weight of 20 percent. But the
commercial banks are striving for 8 percent capital
adequacy ratio.
It is observed from the table that 16 public sector
banks have recorded capital to risk weightage asset
ratio is above 10% at the end of March 1997 which is
above the stipulated 9% margin. But is gradually
increased to 26 public sector banks at the end of
March 2006. More over 9 public sector banks recorded
the ratio less than the 9% and gradually decreased to
1 public sector banks at the end of March 2006. The
favourable development in this area is facilitated to
considerable extent by large scale recapitalization of
public sector banks after 1996 – 1997.
7
Credit Risks of NPAs: The most of the public sector
banks are incapable of visualizing the risk they are
going to face in the emerging global economic
scenario. The risk management machinery adopted
requires a comprehensive overhaul of the system by the
banks in this changing condition. The second
consultative document on the New Basle capital accord
on banking supervision has given a stress on the risk
management aspect of the banks by introducing a more
risk sensitive standardized approach towards capital
adequacy. In spite of the stringent recommendations
and RBIs apprehensions of the adequate preparedness
of the banking sector in adopting instructions, it is
quite clear about the willingness of the banks to
vigorously pursue effective credit risk management
mechanism by visualizing the magnitude of credit risk
management to curtail the growth of mounting NPAs.
The concept of recovering debts through Debt
Recovery Tribunals has become a grand failure.
The concept of establishing Asset Reconstruction
Company (ARC) has greatly benefited the banks in
containing the NPAs at a manageable level. The ARC
is to take over the bad debts of the public sector
banks. These banks have the option of either
liquidating the assets of defaulting companies or
writing off these bad debts altogether. The viable
solution available to the public sector banks is to go
for a better credit risk management scheme, which may
be considered as difficult preposition. However a clear
understanding of the concept of risk, availability of
instruments to curtail risk and the strategies required to
be adopted for implementing a risk management system
are considered to be the call of the hour.
Credit Risk Concept: The risk is inherent and
absolutely unavoidable in banking sector. The risk is
considered to be potential loss of an asset and portfolio
is likely to suffer due to various reasons. It is around
for centuries and thought to be the dominant financial
risk today. The risk can be defined as the risk of
erosion of value due to simple default and non-payment
of the debt by the borrower. The degree of risk is
reflected in the borrower’s credit rating, the premium
it pays for funds and market price of the debts.
M anagement of Credit Risk: The credit risk is one of
the most significant risk classes for financial
institutions and banks in India. There is no liquid
market for trading the credit risk. In such a situation
the financial institutions may increase their net market
exposure sometimes at the expense of increasing the
credit risk to certain parties. The credit derivatives
allow financial institutions to change their exposure to
a range of credit related risks. There are various
structures that allow the transference of credit risk from
one party to another. In some cases the bank can buy
 Res. J. Soc. Sci., 3: 4-12, 2008

Table 1: N PAs in Public Sector Banks

Y ear Gross non-perform ing assets % Am ount in lakh Rupees N et non – perform ing assets %
1992 – 1993 39253 23.18 N il
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1993 -94 41041 24.78 19691 14.46
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1994 -95 38385 19.45 17566 10.67
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1995 -96 41661 18.01 18297 8.9
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1996 -97 47300 15.7 22340 8.1
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1997 – 98 50815 14.4 23761 7.3
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1998 – 99 58720 14.7 28020 7.6
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1999 – 00 60408 12.7 30073 6.8
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2000 – 01 63741 11.4 32461 6.2
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2001 – 02 70861 10.4 35554 5.5
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2002 – 03 68717 8.8 29692 4.0
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2003 – 04 61785 7.2 24396 2.8
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2004 - 05 58300 5.2 21441 2.6
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2005 - 06 51816 3.3 18529 1.2
Source: Report on Trend and Progress of Banking in India various issues

Table 2: Capital To Risk W eightage Asset Ratio of Public Sector Banks

Y ear Below 4% Below 4% to 9% Below 9% to 10% Above 10% Total
1996 – 97 2 0 9 16 27
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1997 –98 1 - 6 20 27
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1998 – 99 1 - 5 21 27
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1999- 00 1 - 4 22 27
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2000 – 01 1 1 2 23 27
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2001 – 02 1 1 2 23 27
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2002 – 03 - - 4 23 27
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2003 – 04 - - 1 26 27
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2004 – 05 - - 1 26 27
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2005 – 06 - - 1 26 27
Source: Report on Trend and Progress of Banking in India various issues

Table 3: Recovery of N pas (Am ount in R S. Crore)

Year Gross NPAs Net Recovery % Of recovery to gross NPAs
02 -03 68717 23183 33.74
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
03 - 04 64785 28004 43.37
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
04 – 05 59373 26940 45.37
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
05 – 06 51816 29087 56.14
-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
06 -07 50552 27176 53.76
Source: D eccan Chronicle 27 Novem ber 2007

8
 Res. J. Soc. Sci., 3: 4-12, 2008
protection in the form of default puts to transfer the
credit risk to an insurance company or other financial
investors. Moreover the bank may swap one credit for
another credit of equal rating to reduce its exposure to
one party.
The credit risk management has two basic objectives
C It manages the asset portfolio in a manner which
ensures that the banks have adequate capital to
hedge their risks and
C It matches the return to the risk. It is comprising
of two basic steps viz.,
Identification and Ascertainment of Credit Default
Risk: In order to assess the credit default risk the
concerned bank has to check the following five C’s
from the borrower.
C Cash flows reflecting the earning capacity of the
borrower.
C Collateral - the tangible assets of the borrowers
who intends to mortgage.
C Character – the management capabilities of the
concerned party.
C Conditions - the loan covenants to safeguard the
lenders interest and
C Capital - referring to the buffer to absorb earnings
shocks.
Utilization of credit default protection measures
and instruments: O nce the credit default is ascertained
and quantified, credit default protection measures and
instruments like credit default swaps, credit default
options and credit linked notes can be utilized.
Credit Default Swap: It is a bilateral financial contract
in which buyer pays a periodic fee expressed in fixed
basis points on the notional amount in return for a
floating payment contingent on the default of a third
party reference credit. The floating payment is
designated to mirror the loss incurred by creditors of
the reference credit in the event of its default. The
credit event various from bank to bank and from
transaction to transaction. The credit events are pre
defined in the agreement, which includes 1. Bankruptcy
2. Insolvency 3. Rating, and downgrading below agreed
threshold 4. Failure to adjust for new payment
obligation and 5. Debt Rescheduling. The credit event
triggers the obligation of the seller of default protection
to the purchaser of the same. The investors who need
to protect themselves against default but do not want
to sell the at risk security for accounting, tax and
regulatory reasons can buy a credit default swap.
9
Credit Limited Notes (CLN): These are known as
credit swaps in which buyer makes periodic payments
of a fixed percentage of the reference asset to the
seller over the life of the swap. Then the seller
promises a payment in the case of credit default for
the reasons viz., bankruptcy, delinquency and credit
rating down grade. The payments may be either a
pre - determined amount and also decrease in the
market value of the reference obligation that may cause
the credit event. The seller calls the structure away
from the investor and delivers the defaulting notes
against them on the happening of credit event.
The CLN are like bonds in character and are
acceptable to certain banks. They are not allowed to
involve in credit default swap.
Consequences of NPAs: The contaminated portfolio is
definitely a bane for any bank. It puts severe dent on
the liquidity and profitability of the bank where it is
out of proportion. The NPAs in the public sector banks
are well above the normal level. The consequences
envisaged during the past several years are many.
It has become a difficult task for the banks to reduce
the lending rate due to the presence of large NPAs.
Ultimately this is affecting the competitiveness of the
Indian banks. W hen the bank does not enjoy the
market competitiveness naturally the credit expansion
would be slumped and when it happens, the
profitability gets a set back. In this way the vicious
circle will go on and on.
Another important one is the reduction in the
availability of funds for further expansion due to the
unproductiveness of the existing portfolio. Sometimes
it is found that the presence of large NPAs discourages
banks to accept profitable but risky proposal loan from
the customers. The NPAs also affect the risk taking
ability of the banks. On the whole it affects the
credibility of the bank and faces difficulty in raising
fresh capital from the market for future requirements.
M easures to Control NPAs M enace: It is proved
beyond doubt that NPAs in bank ought to be kept at
the lowest level. Two pronged approaches viz., 1.
Preventive management and 2. Curative management
would be necessary for controlling NPAs.
Preventive M anagement:
C r ed it A sse ssm e n t a n d R isk M a n a g e m e n t
M echanism: A lasting solution to the problem of
NPAs can be achieved only with proper credit
assessment and risk management mechanism. The
documentation of credit policy and credit audit
immediately after the sanction is necessary to upgrade
the quality of credit appraisal in banks. In a situation
 Res. J. Soc. Sci., 3: 4-12, 2008
of liquidity overhang the enthusiasm of the banking
system is to increase lending with compromise on asset
quality, raising concern about adverse selection and
potential danger of addition to the NPAs stock. It is
necessary that the banking system is equipped with
prudential norms to minimize if not completely avoid
the problem of credit risk.
Organisational Restructuring: W ith regard to internal
factors leading to NPAs the onus for containing the
same rest with the bank themselves. These will
necessities organizational restructuring improvement in
the managerial efficiency, skill up gradation for proper
assessment of credit worthiness and a change in the
attitude of the banks towards legal action, which is
traditionally viewed as a measure of the last resort.
Reduce Dependence on Interest: The Indian banks are
largely depending upon lending and investments.
The banks in the developed countries do not depend
upon this income whereas 86 percent of income of
Indian banks is accounted from interest and the rest of
the income is fee based. T he banker can earn sufficient
net margin by investing in safer securities though not
at high rate of interest. It facilitates for limiting of high
level of NPAs gradually. It is possible that average
yield on loans and advances net default provisions and
services costs do not exceed the average yield on
safety securities because of the absence of risk and
service cost.
Potential and Borderline Npas under Check: The
potential and borderline accounts require quick
diagnosis and remedial measures so that they do not
step into N PAs categories. The auditors of the banking
companies must monitor all outstanding accounts in
respect of accounts enjoying credit limits beyond cut –
off points, so that new sub-standard assets can be kept
under check.
Curative M anagement: The curative measures are
designed to maximize recoveries so that banks
funds locked up in NPAs are released for recycling.
The Central government and RBI have taken steps for
arresting incidence of fresh NPAs and creating legal
and regulatory environment to facilitate the recovery of
existing NPAs of banks. They are:
Debt Recovery Tribunals (DRT): In order to expedite
speedy disposal of high value claims of banks Debt
Recovery T ribunals were setup. T he Central
Government has amended the recovery of debts due to
banks and financial institutions Act in January 2000 for
enhancing the effectiveness of DRTs. The provisions
10
for placement of more than one recovery officer, power
to attach dependents property before judgment, penal
provision for disobedience of Tribunals order and
appointment of receiver with powers of realization,
management, protection and preservation of property
are expected to provide necessary teeth to the DRTs
and speed up the recovery of NPAs in times to come.
Lok Adalats: The Lok adalats institutions help banks
to settle disputes involving accounts in doubtful and
loss categories. These are proved to be an effective
institution for settlement of dues in respect of smaller
loans. The Lok adalats and Debt Recovery Tribunals
have been empowered to organize Lok adalats to
decide for NPAs of Rs. 10 lakhs and above.
A sset Reconstruction C ompany (AR C ): T he
Narasimham Committee on financial system (1991) has
recommended for setting up of Asset Reconstruction
Funds (ARF). The following concerns were expressed
by the committee.
C It was felt that centralized all India fund will
severely handicap in its recovery efforts by lack of
widespread geographical reach which individual
bank posses and.
C Given the large fiscal deficits, there will be a
problem of financing the ARF.
Subsequently, the Narasimham committee on
banking sector reforms [5 ] has recommended for transfer
of sticky assets of banks to the ARC. Thereafter the
Varma committee on restructuring weak public sector
banks has also viewed the separation of NPAs and its
transfer thereafter to the ARF is an important element
in a comprehensive restructuring strategy for weak
banks. In recognition of the same ARC B ill was passed
to regulate Securitization and Reconstruction of
financial assets and enforcement of security interest.
The ICICI BANK, State B ank of India and IDBI have
promoted the country’s first Asset Reconstruction
Company. The company is specialized in recovery and
liquidation of assets. The NPAs can be assigned to
ARC by banks at a discounted price. The objective of
ARC is floating of bonds and making necessary steps
for recovery of NPAs from the borrowers directly.
This enables a one time clearing of balance sheet of
banks by sticky loans.
Corporate Debt Restructuring (CDR): The corporate
debt restructuring is one of the methods suggested for
the reduction of NPAs. Its objective is to ensure a
timely and transparent mechanism for restructure of
corporate debts of viable corporate entities affected by
 Res. J. Soc. Sci., 3: 4-12, 2008
the contributing factors outside the purview of BIFR,
DRT and other legal proceedings for the benefit of
concerned. The CDR has three tier structure viz., a.
CDR standing forum b. CDR empowered group and c.
CDR cell.
The M echanism of the CDR: It is a voluntary system
based on debtors and creditors agreement. It will not
apply to accounts involving one financial institution or
one bank instead it covers multiple banking accounts,
syndication, consortium accounts with outstanding
exposure of Rs. 20 crores and above by banks and
institutions.
The CDR system is applicable to standard and
sub – standard accounts with potential cases of NPAs
getting a priority. In addition to the steps taken by the
RBI and Government of India for arresting the
incidence of new NPAs and creating legal and
regulatory environment to facilitate for the recovery of
existing NPAs of banks, the following measures were
initiated for reduction of NPAs.
Circulation of Information of Defaulters: The RBI
has put in place a system for periodical circulation of
details of willful defaulters of banks and financial
institutions. The RBI also publishes a list of borrowers
(with outstanding aggregate rupees one crore and
above) against whom banks and financial institutions in
recovery of funds have filed suits as on 31 st March
every year. It will serve as a caution list while
considering a request for new or additional credit limits
from defaulting borrowing units and also from the
directors, proprietors and partners of these entities.
Recovery Action A gainst Large NPAs: The RBI has
directed the PSBs to examine all cases of willful
default of Rs. One crore and above and file criminal
cases against willful defaulters. The board of directors
are requested to review NPAs accounts of one crore
and above with special reference to fix staff
accountability in individually.
It is observed from the above table that the
gross NPAs of the banks is gradually declining from
Rs. 68717 crores in 2002 - 03 to Rs. 50552 crores in
2006 – 07 whereas the net recovery of NPAs is
increasing from Rs. 23183 crores in 2002 - 03 to Rs.
27176 crores in 2006 – 07. It shows that the banks
have taken strenuous efforts to contain the NPAs.
Moreover the percentage of recovery to gross NPAs is
also in the increasing trend.
Credit Information Bureau: The institutionalization of
information sharing arrangement is now possible
through the newly formed Credit Information Bureau of
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India Limited (CIBIL) It was set up in January 2001,
by SBI, HDFC, and two foreign technology partners.
This will prevent those who take advantage of lack of
system of information sharing amongst leading
institutions to borrow large amount against same assets
and property, which has in no measures contributed to
the incremental of NPAs of banks.
Conclusion: It is needless to mention, that a lasting
solution to the problem of NPAs can be achieved only
with proper credit assessment and risk management
mechanism. In a situation of liquidity overhang, the
enthusiasm of the banking system to increase lending
may compromise on asset quality, raising concern
about their adverse selection and potential danger of
addition to the stock of NPAs. It is necessary that the
banking system is to be equipped with prudential
norms to minimize if not completely to avoid the
problem of NPAs. The onus for containing the factors
leading to NPAs rests with banks themselves. This will
necessitates organizational restructuring, improvement
in the managerial efficiency and skill upgradation for
proper assessment of credit worthiness
It is better to avoid N PAs at the nascent stage of
credit consideration by putting in place of rigorous and
appropriate credit appraisal mechanisms. Having regard
to strong possibilities of NPAs assuming high
proportion of total assets, unless the authorities for
preventing mounting NPAs thereby eroding the
profitability and liquidity of the banks initiate serious
corrective action. At the outset NPAs are considered to
be gloomy as well as greedy to the Indian economy.
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2. Muniappan, C.P., The NPA overhang, magnitude
solutions, legal reforms, EconomicDevelopments in
India, Vol. 52.
3. Namboodri, T.C.G., NPA: Prevention is Better than
Cure, V inimaya N ational Instituteof Bank
Management, XXII(3): Oct-Dec2201.
4. Study on preventing slippage of NPAs, Reserve
Bank of India Report, 2002. Academic Foundation,
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5. Narasimham, M., 1998. Report of the committee
on Banking Sector Reforms.
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Bank of India.
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