A Study on Non Performing Assets of Indians Banks: Trend and Recovery

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1 A Study on Non Performing Assets of Indians Banks: Trend and Recovery Associate Professor, Department of Economics, Dayalbagh Educational Institute, Agra 1. INTRODUTION Banks are the basis of any economy. It is a prerequisite to have a healthy banking industry to put the economy in the growth trajectory.indian banking system performing a significant role to increase the GDP of the economy. It has undergone remarkable transformation and adopted international best practices in regulation and supervision of money market. Since financial sector reforms 1990s many changes have took place in Indian industries including banking industry. One of the major changes is the introduction of prudential norms which has created the competitive and vibrant banking system. Norm means to allow entry of new private sector banks and foreign banks, access the capital market permission, flexibility in operational work and financial autonomy to public banks, improve to corporate governance practices and maintain standards practices. Banks have diversified our role into non-traditional activities and result comes in the form of conglomerate.therefore, deregulation has opened up new height for banks to expand income. In spite of the noteworthy performance of Indian banks, the most serious problem being faced by banks in recent time is increasing amount of non-performing assets (NPAS). One can define NPAs to be a nonperforming loan or a loan in which interest and principal is not being repaid and instead getting overdue for several months in a row. These loans affect the capability and solvency of banks to provide loans. The term non-performing assets figured in the Indian banking sector after introduction of financial sector reforms in The prudential norms on income recognition, assets classification and provisioning thereon are implemented from the financial year , as per the recommendation of the committee on the financial system (Narsimham Committee). These norms have brought in quantification and objectivity into the assessment and provisioning for NPAs. Reserve bank of India constantly endeavors to ensure that prescriptions in this regard are close to international norms. As of June 2016, the total amount of Gross Non-Performing Assets (NPAs) for public and private sector banks is around Rs. 6 lakh crore. Indian Overseas Bank fares worst, having the highest ratio of NPA to total advances per cent. UCO Bank (18.66 per cent) and Bank of India (16.01 per cent) follow. In absolute terms, State Bank of India has the highest value of Gross NPA around Rs. 93,000 crores. Punjab National Bank (Rs. 55,000 crores) and Bank of India (Rs. 44,000 crores) come next. NPAs adversely influence lending activity of banks as it neglects the effectiveness of credit dispensation process. Non recovery of loans also hurt the profitability of banks. Besides, banks with high level of NPAs have to carry more own funds by way of capital and create reserves and provisions and to provide cushion for the loan losses. NPAs, thus, make two pronged attack on the bottom lines of banks: one, interest applied on such assets is not taken into account because such interest is to be taken into account only on its realization, second, banks have to make provisions for NPAs from the income earned by them on performing assets. Persistently high level of NPAs makes banks and financial institutions weak leading ultimately to their failure. This shakes confidence both of domestic and global investors in the banking system. Thus, managing bad loans and keeping them at the lowest possible level is critical and need of the hour for banks. 457

2 Therefore this paper is an attempt to analyze the trend of NPA and its management techniques adopted by Reserve Bank of India. 2. REVIEW OF LITERATURE Prashanth K Reddy (2002) in his study focuses on comparative study of Non Performing Assets in India in the Global context - similarities and dissimilarities, remedial measures and concluded the importance of a sound understanding of the macroeconomic variables and systemic issues pertaining to banks and the economy for solving the NPA problem along with the criticality of a strong legal framework and legislative framework. Foreign experiences must be utilized along with a clear understanding of the local conditions to create a tailor made solution which is transparent and fair to all stakeholders. Harpreet kaur and J. S. Pasricha,(2004) concluded a research on management of NPAs in Public sector banks over a 8 years period ending 2002 and show that gross NPA has registered a constant increase from This study point out the sector wise and bank wise position of NPA in PSBs. It was suggested that follow proper policy of appraisal, supervision and follow up of advances be taken up to controlling the NPAs. He Dong, IMF(2004) investigated the procedure of resolving NPAs of the Indian banking system the role of ACRs. Dr. Janardhar G. Naik (2006) pointed out on the problem of NPAs management in banking sector and concluded that government of India has to set ARCs to manage NPAs to face the challenges before the banking sector. Jatna, Ranu (2009) states main cause of mounting NPA in public sector banks in malfunctioning of the banks.narasimham committee identitified the NPAs as one of the possible effects of malfunctioning of public sector bank. Singh V.R (2015) concluded that extent of NPA is comparatively very high in public sector banks.mishra, U.M (2017) his study shows the bank seems to have an increasing trend of NPA. 3. OBJECTIVES OF THE STUDY The objectives of the present study are as follow: 1. To study the concept of NPA in India banking. 2. To analyze the trend of Gross NPA and Net NPA of schedule commercial banks in the past 17 years. 3. To study the various recovery channels of NPA. Present study will consider the seventeen year ( ) of data to study the trend of NPA in Indian banking. The data has been retrieved from various publications of reserve bank of india. 4. MEANING AND TYPES OF NPA (NON-PERFORMING ASSETS) According to RBI, an asset becomes non-performing when it ceases to generate income for the bank. Earlier an asset was considered as non-performing asset (NPA) based on the concept of 'Past Due'. A nonperforming asset (NPA) was defined as credit in respect of which interest and/ or instalment of principal has remained past due for a specific period of time. The specific period was reduced in a phased manner as under: Year ended March, 31 Table 4 Specific period quarters quarters quarters 458

3 With a view to moving towards international best practices and to ensure greater transparency, '90 days' overdue norms for identification of NPAs have been made applicable from the year ended March 31, As such, with effect from March 31, 2004, a non-performing asset shall be a loan or an advance where: Interest and/or instalment of principal remain overdue for a period of more than 90 days in respect of a Term Loan. The account remains 'Out of order' for a period of more than 90 days, in respect of an Overdraft/ Cash Credit (OD/CC). The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. 4.1 ASSETS CLASSIFICATION Reserve bank of India classified assets into four categories. These are Standard Assets: Standard assets are the ones in which the bank is receiving interest as well as the principal amount of the loan regularly from the customer. If asset fails to be in category of standard asset that is amount due more than 90 days then it is NPA. Sub Standard Assets: With effect from 31 March 2005, a substandard asset would be one, which has remained NPA for a period less than or equal to 12 month. The following features are exhibited by substandard assets: the current net worth of the borrowers / guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full; and the asset has well-defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. Doubtful Assets: With effect from March 31, 2005, an asset would be classified as doubtful if it remained in the sub-standard category for 12 months. Loss Assets: A loss asset is one which considered uncollectible and of such little value that its continuance as a bankable asset is not warranted- although there may be some salvage or recovery value. Also, these assets would have been identified as loss assets by the bank or internal or external auditors or the RBI inspection but the amount would not have been written-off wholly. 4.2 TYPES OF NPA Non Performing Assets of banks can be divided into two parts. They are as follow: Gross NPA: Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the nonstandard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio: Gross NPAs Ratio = Gross NPAs / Gross Advances Net NPA: Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant. That is why the difference between gross and net NPA is quite high. It can be calculated by following Net NPAs = Gross NPAs Provisions / Gross Advances Provisions 459

4 5. TREND OF GROSS AND NET NPA Table 5 Year Gross NPA Net NPA Source: Reserve bank of India, statistical tables relating to banks in India Table 5 shows that the trend of Gross NPA and Net NPA, table indicating that the amount of Net NPA has decreased from the year 2000 to 2005 that is to respectively. The main reason of this improvement is the setting up of the Asset Reconstruction Corporation of India (ARCIL). It has provided a major boost to banks efforts to recover their NPAs. After the year 2005 we can see the significant increase in NPA of banking sector due to the hardening of interest rates which might have made the repayment of loans difficult for some borrowers. The growth in NPAs of Indian banks has largely followed a lagged cyclical pattern with regard to credit growth, the pro-cyclical behaviour of the banking system, wherein asset quality can get compromised during periods (2009 TO 2012) of high credit growth and this can result in the creation of NPAs for banks in the later years. 6. RECOVERY CHANNEL OF NPA IN INDIAN BANKING Trend of NPA in Indian banking indicating variation in the absolute amount during the year The higher amount is due to slow and ineffective recovery of bank credit, lacuna in credit recovery system, inadequate legal provision etc. Various steps have been taken by the government and Reserve Bank of india to recover and reduce NPAs. Among others Settlement / compromise scheme, Lok adalats, Debt Recovery Tribunals, SARFAESI Act are common. Management of NPA is also done with the help of recovery tribunals, corporate reconstruction companies and credit information by CIBIL. Table 6 NPA of schedule commercial banks recovered from various channels 460

5 Year Sr No. Recovery Channel Lok Adalats DRTs SARFAESI Act Total 1 No. of cases referred Amount involved Amount recovered* as per cent of No. of cases referred ,707# Amount involved Amount recovered* as per cent of No. of cases referred Amount involved Amount recovered* as per cent of No. of cases referred Amount involved Amount recovered* as per cent of No. of cases referred Amount involved Amount recovered* as per cent of Source : Reserve Bank of India,statistical tables related to banking in India Table 3 indicating that Banks have been making all efforts to reduce their non-performing assets through various legal channels like resolutions through Lok Adalats, Debt Recovery Tribunals (DRTs) and invocation of SARFAESI. In spite of the Table 3 shows that during the period of 2012 to 2017 the percentage of recovered amount is decreasing that is decreased from 22 % in 2012 to 10 % in The deceleration in recovery was mainly due to a reduction in recovery through the SARFAESI channel. Banks also reduced their stressed assets by selling them to asset reconstruction companies (ARCs). CONCLUSION NPA can become the major problem for any economy if it cannot handle effectively.npa has a sever negative effect on the profitability, liquidity and the credit of the banking sector. If government manage this issue efficiently then the amount recovered from the borrowers can be use to reduce many macroeconomic issues like poverty, unemployment, imbalances of balance of payment and may also strengthen the money market or the image of Indian banking system in international market. REFERENCES 461

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