The reform measures have also resulted in an improvement in the profitability of banks. The Return on Assets (RoA) of scheduled commercial banks increased from 0.4 percent in the year 1991-92 to 0.99 per cent in 2007-08. The Indian banks would appear well placed in this regard too.
NON PERFORMING ASSETS (NPA)
Non performing asset means an asset or account of borrower, which has been classified by bank or financial institution as sub -standard, doubtful or loss asset, in accordance with the direction or guidelines relating to assets classification issued by RBI . An amount due under any credit facility is treated as "past due "when it is not been paid within 30 days from the due date. Due to the improvement in the payment and settlement system, recovery climate, up gradation of technology in the banking system etc, it was decided to dispense with "past due "concept, with effect from March 31, 2001. Accordingly as from that date, a Non performing asset shell be an advance wherein. i Interest and/or installment of principal remain overdue for a period of more than 180days in respect of a term loan, ii. The account remains 'out of order 'for a period of more than 180 days, in respect of an overdraft/cash credit (OD/CC) iii. The bill remains overdue for a period of more than 180 days in case of bill purchased or discounted. iv. Interest and/or principal remains overdue for two harvest season but for a period not exceeding two half years in case of an advance granted for agricultural purpose, and. Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.
FACTORS FOR RISE IN NPAs
INTERNAL FACTORS
Defective Lending process
The banker should, take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully. He should be a person of integrity and good character.
Inappropriate technology
Due to inappropriate technology and management information system, market driven decisions on real time basis can not be taken. Proper MIS and financial accounting system is not implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of the bank should be computerized.
Improper SWOT analysis
The improper strength, weakness, opportunity and threat analysis is another reason.While providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and credit worthiness of the borrower.1.Banks should consider the borrowers own capital investment. 2. It should collect credit information of the borrowers a) from banker's b. Enquiry from market/segment of trade, industry, business. c) From external credit rating agencies. ยท Analyze the balance sheet. True picture of business will be revealed on analysis of profit/loss a/c and balance sheet. 3. Purpose of the loan. When bankers give loan, he should analyze the purpose of the loan. To ensure safety and liquidity, banks should grant loan for productive purpose only. Bank should analyze the profitability, viability, long term acceptability of the project while financing.
Poor credit appraisal system
Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use good credit appraisal to decrease the NPAs.
Managerial deficiencies
The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. When accepting securities banks should consider the 1.Marketability 2.Acceptability 3.Safety 4.Transferability. The banker should follow the principle of diversification of risk based on the famous maxim "do not keep all the eggs in one basket"; it 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. If a new big customer meets misfortune or certain traders or industries affected adversely, the overall position of the bank will not be affected. Like
Absence of regular industrial visit
The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The NPAs due to willful defaulters can be collected by regular visits.
EXTERNAL FACTORS
Willful Defaults
There are borrowers who are able to payback loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans.
Natural calamities
This is the measure factor, which is creating alarming rise in NPA's of the PSB's. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours framers depends on rain fall for cropping. Due to irregularities of rain fall the framers are not to achieve the production level thus they are not repaying the loans.
Industrial sickness
Improper project handling , ineffective management , lack of adequate resources , lack of advance technology , day to day changing govt. Policies give birth to industrial sickness. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity.
Lack of demand
Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. The banks recover the amount by selling of their assets, which covers a minimum label. Thus the banks record the non recovered part as NPAs and has to make provision for it.
Non Performing Assets of ICICI bank and PNB
Punjab National Bank (PNB) marches ahead of the country's largest private sector lender ICICI Bank in terms of total business, though it witnessed lesser increase in profit during the quarter ended June 30.
In terms of total business, PNB clocked Rs 6.79 lakh crore much ahead of the its private sector peer ICICI Bank with a total business mix of Rs 5.36 lakh crore at the end of June 2012..
At the same time, the gross NPAs of ICICI Bank came down to 3.54% at the end of June 30 against 4.36% at the end of first quarter of the previous fiscal. The closest competitor of ICICI Bank, PNB recorded 13% growth in net profit at Rs 1,246 crore in the first quarter even as gross NPA rose by over 1%..
The gross NPA of PNB as a proportion of advances went up significantly to 3.34% against 2% at the end of June last year. Net NPA also rose to 1.68% during the period from 0.86% in the same period of previous year.
MEASURES
CIBIL (Credit Information Bureau of India Ltd)
It was established in 2000, with SBI and HDFC holding 40% stakes each, and Dun & Bradstreet and TransUnion holding 10%each of the balance. The credit information bureau is repositoryofinformation,whichcontains the credit history of commercial and consumer borrowers. Member banks/institution exchange customer credit appraisal-related data, and thus accounts with a poor credit record are identified for proper action. Currently, most banks are members of CIBIL.
Early Warning Signals
Early warning signals are used by different banks for identification of potential NPAs.
it is revealed that the indicators which may trigger early warning system depend not only on default in payment of installment and interest but also other factors such as deterioration in operating and financial performance of the borrower, weakening industry characteristics, regulatory changes, and general economic conditions. Early warning signals can be classified into five broad categories viz.
(a) Financial
(b) Operational
(c) Banking
(d) Management and
(e) External factors.
One Time Settlement Schemes
This scheme covers all sectors sub - standard assets, doubtful or loss assets. All cases on which the banks have initiated action under the SRFAESI Act and also cases pending before Courts/DRTs/BIFR, subject to consent decree being obtained from the Courts/DRTs/BIFR are covered. However cases of willful default, fraud and malfeasance are not covered. As per the
OTS scheme, for NPAs up to Rs. 10crores, the minimum amount that should be recovered should be 50%-100% of the outstanding balance in the account.
Know your client' profile (KYC)
Most banks in India have a system of preparing `know your client' (KYC) profile/credit report. As a part of `KYC' system, visits are made on clients and their places of business/units. The frequency of such visits depends on the nature and needs of relationship.
Conclusion
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 up gradation for proper assessment of credit worthiness. It is better to avoid NPAs at the nascent stage of credit consideration by putting in place of rigorous and appropriate credit appraisal mechanisms.
