playing a vital role in the Indian economy. The main function of the banks is
to mobilize deposits from public and lend to the needy. Thus the banks are
trusted and they are trustees of public money.
The apathy of Big
Businessmen is leading banks into losses. Bad loans are said to be the
Non-performing assets, when the Principal and interest amount are overdue for
more than 90 days. The failure of the borrower to honor his commitments on due
date is due to number of reasons, beyond his control in some cases. However,
lackadaisical conduct of the banks either under pressure from influential
sections of society or mollified motive or greed of earning usurious interest
do contribute significantly for the generation and growth of Non-performing
The present article
seeks to highlight the effects of the Non-performing assets on banks and
its deploring effect on society and the customers in general.
Banks are the nervous system
of the Indian economy. Banks the main source of income is the difference
between the interest they earn on loans given by them and interest they pay on
Assets for any bank are loans it has lent and
investments made by the bank. Bad debts or nonperforming assets defines the
financial condition of the banks. In general, non-performing asset indicates
the amount of loan that was not returned by the borrower. An asset becomes a
nonperforming asset when it ceases to generate income.
According, an analysis
present NPA rate of Indian economy is 9.9%, India has been ranked 5th
on the list of countries with highest non-performing assets.
NPA Rupees (crores)
As per RBI analysis
following are the non-performing assets ratio in India.
LOAN: A thing that is
borrowed, especially or the sum of money that is expected to pay back with
interest. There are different types of loans like
Ø HOME LOAN: Bank provides a loan to the people
who wish to buy their own house.
Ø PERSONAL LOAN: The Personal loan is given to
buy some expensive gadgets. This money can be used for any purpose.
Ø VEHICLE LOAN: These loans are given to fulfill
your dream of having one car or bike. A Lender will have the possession of the
vehicle till the last installment is made.
Ø Business loan: These loans are generally
granted to the existing businessmen, to expand their business. Getting loans
for startups is very much difficult.
Ø GOLD LOANS: This is the safest loan among all
the loans. With the trend in the gold rates, interest rates also vary. The Lender has the right to sell the gold in an auction at the
time of default made by the borrower.
Ø LOANS AGAINST INSURANCE POLICY: This loan is
given by insurance company itself against the policy issued by it. Otherwise,
one can get sanctioned by the bank also. Only 80%of surrender value is given as
Ø AGRICULTURE/CROP LOANS: Agriculture loan
enables farmers to get finance for various agriculture operations. The Rate of
interest on these land is slightly low, compare to other loans in the market.
Ø EDUCATION LOAN: These loans are provided with
an intention of providing education to every individual. Usually, interest on
this loans is very low.
Definition: A non-performing asset (NPA) is a loan or
advance for which the principal or interest payment remained overdue for a
period of 90 days.
According to RBI “An asset, including a leased asset, becomes non-performing when it
ceases to generate income for the bank. A ‘non-performing asset’ (NPA) was
defined as a credit facility in respect of which the interest and/ or
installment of principal has remained ‘past due’ for a specified period of
time. The specified period was reduced in a phased manner as under:
Assets of the banks are
classified into different types, they are
v STANDARD ASSET: The
Standard asset is one which does not disclose any problem and which does not
carry more than normal business risk.
STANDARD ASSET: A
substandard asset can be defined as an asset which remained a non-performing
asset for less than or equal to 12 months.
ASSET: Ana asset is to be
considered as a Doubtful asset if it remains a substandard asset for more than
v LOSS ASSET: When an asset remains a
Nonperforming asset for more than 36 months then it is said to be a loss asset.
TYPES OF NON-PERFORMING ASSETS:
v GROSS NPA: Gross non-performing assets consists
of all standard assets. Substandard assets, doubtful assets, and loss assets.
They are the loan assets classified as a non-performing asset as per guidelines
of RBI. The gross NPA can be calculated using the below formula.
v NET NPA: Net NPA can be defined as the
difference between a Gross non-performing asset and the provision made to write
off non-performing assets.
REASONS THE GROWING NON
There two types of
reasons which are increasing non-performing asset. They are
Following are the
INTERNAL FACTORS which causes growth of NPA’s
Ø Business failure: A situation in which a company or other business is
unable to generate sufficient revenue to cover its expenses.
business is unable to generate income, then it may not be able to pay the loan
amount it has lent and hence after some time it is to be considered as a
Ø Funds borrowed for a particular purpose but not
used for the said purpose.
suppose, Anita has taken a loan to start a business, but instead of doing
business, she constructs a house with the loan amount.
such type of loans may become irrecoverable and if it is not recovered within
90days then it is to be treated as a non-performing asset.
Ø Project not completed on time
Ø Willful defaults: Willful default is a conscious abstention by an obligor
from doing that which reasonably and under the terms of the obligation he
should have done. The words “willful default” imply more than
negligence or carelessness. The word willful means intentional and
the word default means transgression.
Ø Management disputes, frauds
Ø Inappropriate technology: Due to improper technology and management
information system, market-driven decisions on real-time cannot be taken.
Proper MIS and financial accounting system are not implemented in the banks,
which leads to poor credit collection.
Ø Improper SWOT analysis: SWOT analysis refers to the strength,
weakness, opportunity, threat. Before lending a loan banker should consider all
these and then lend the loan.
Ø Managerial deficiencies: The banker should
follow the principle of diversification of risk based on the famous maxim “do
not keep all the eggs in one basket”, which means that the banker should not
grant advances to a few big farms only or to concentrate them in few industries
or in a few cities.
For example, let us take
the example of IDBI bank, it has given Vijay Malaya a loan of 900 crores
Ø Poor credit appraisal system: Deprived credit appraisal is an additional
factor for the increase in NPAs, due to poor credit appraisal the bank gives
advances to those who are not able to repay it back. They should use better
credit appraisal to reduce the NPAs.
Ø Defective lending process: capacity to pay depends upon, Tangible assets,
Success in business. Willingness to pay depends on, Character, Honest,
Reputation of the borrower. The banker,
therefore, takes utmost care in ensuring that the enterprise or business
for which a loan is sought is a sound one and the borrower is competent of
carrying it out successfully, he should be a person of integrity and good
These are the internal
factors which are causing the non-performing assets.
The EXTERNAL factors
which are increasing non-performing assets are as follows:
Ø INEFFECTIVE RECOVERY TRIBUNAL: Tribunal refers
to a committee or board appointed to make decisions in a particular matter.
There are set of the number of recovery tribunals appointed by the government
to recover the loans and advances. Because of negligence and ineffectiveness in
their work, the bank suffers the consequences of bad loans.
Ø GOVERNMENT POLICIES: Banking sector gets new
principles and policies for its operations with every new government.
Ø WILLFUL DEFAULTS: The word willful defaults refer more
negligence or carelessness.
The following are some
STATE BANK OF INDIA
DECCAN CHRONICLE HOLDING LTD
VENKATRAMAN REDDY,T.VINAYAK,RAV RUDY,P.K.IYER
BANK OF BARODA
SUBHIKSHA TRADING SERVICES LTD
Ø NATURAL CALAMITIES: A major adverse event
resulting from the natural process of the earth are called natural calamities.
Because of irregularities of rainfall, the farmers are not able to attain the
production level. Thus they are not repaying the loans which are ultimately
resulting from as NPA’s to the banks.
Ø INDUSTRIAL RECESSION: The industries which do
not have appropriate project handling, effective management, adequate
resources, and advanced technology such type of loan will end up with a low
IMPACT OF GROWING NON PERFORMING ASSETS:
v Banks will suffer low-profit margins.
v The shareholders of the bank will lose a lot of
Money as banks themselves find difficult to survive in the market.
v The rate of interest will go up badly which
will directly impact the customers.
v The funds are getting redirected from god
projects to the bad ones
v Because of increasing non-performing assets in
banking sector, it causes less money available to fund other project’s
v Liquidity problems may arise when bank do not
get their loan amount back.
v Banks will charge the higher rate of interest
on loans to maintain the profit margin.
HOW TO OVERCOME GROWING
NON PERFORMING ASSETS:
Ø SECURITIZATION AND RECONSTRUCTION OF FINANCIAL
ASSET AND ENFORCEMENT OF SECURITY ACT: According to this Act, if the borrower
fails to pay his dues, then the banker can have the possession of the assets of
defaulting borrowers without giving any notice.
Ø LOK ADALAT: They can recover the non-performing
assets which are up to 5lakhs.
Ø Debt recovery tribunal: These are the group of
people appointed by the government to recover the loans.
DRT was set up in Ahmedabad in 1994. DRT in Hyderabad in1999.
Ø BANKERS SHOULD BE CAUTIOUS: Banks should be aware before lending loans.
NPA ratio is increasing
day by day and present NPA rate in INDIA is 9.9%
Common people are the
one who is getting affected by increasing non-performing assets.
INDIA has been ranked 5th
on the list of the counties with highest non preforming assets.