24-08-2012, 12:07 PM
COMPARATIVE ANALYSIS ONNON PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKS
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ABSTRACT
The accumulation of huge non-performing assets in banks hasassumed great importance. The depth of the problem of bad debts wasfirst realized only in early 1990s. The magnitude of NPAs in banks andfinancial institutions is over Rs.1, 50,000 crore.
While gross NPA reflects the quality of the loans made bybanks, net NPA shows the actual burden of banks. Now it is increasinglyevident that the major defaulters are the big borrowers coming from thenon-priority sector. The banks and financial institutions have to take theinitiative to reduce NPAs in a time bound strategic approach.
Public sector banks figure prominently in the debate not onlybecause they dominate the banking industries, but also since they havemuch larger NPAs compared with the private sector banks. This raises aconcern in the industry and academia because it is generally felt thatNPAs reduce the profitability of a bank, weaken its financial health anderode its solvency.
Introduction
NPA. The three letters Strike terror in banking sector and business circle today. NPA is short form of “Non Performing Asset”. The dreaded NPA rule says simply this: when interest or other due to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns a non performing asset. The recovery of loan has always been problem for banks and financial institution. To come out of these first we need to think is it possible to avoid NPA, no cannot be then left is to look after the factor responsible for it and managing those factors.
Definitions:
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 instalment of principal has remained ‘past due’ for a specified period of time.
With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the ‘90 days’ overdue’ norm for identification of NPAs, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA)
NPAs: AN ISSUE FOR BANKS AND FIs IN INDIA
To start with, performance in terms of profitability is a benchmark for any business enterprise including the banking industry. However, increasing NPAs have a direct impact on banks profitability as legally banks are not allowed to book income on such accounts and at the sometime are forced to make provision on such assets as per the Reserve Bank of India (RBI) guidelines. Also, with increasing deposits made by the public in the banking system, the banking industry cannot afford defaults by borrower s since NPAs affects the repayment capacity of banks.
Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system through various rate cuts and banks fail to utilize this benefit to its advantage due to the tear of burgeoning non-performing assets.
INDIAN ECONOMY AND NPAs
Undoubtedly the world economy has slowed down, recession is at its peak, globally stock markets have tumbled and business itself is getting hard to do. The Indian economy has been much affected due to high fiscal deficit, poor infrastructure facilities, sticky legal system, cutting of exposures to emerging markets by FIs, etc.
Further, international rating agencies like, Standard & Poor have lowered India’s credit rating to sub-investment grade. Such negative aspects have often outweighed positives such as increasing forex reserves and a manageable inflation rate.
Under such a situation, it goes without saying that banks are no exception and are bound to face the heat of a global downturn. One would be surprised to know that the banks and financial institution in India hold nonperforming assets worth Rs. 110000 crores Bankers have realized that unless the level of NPAs is reduced drastically, they will find it difficult to survive.
GLOBAL DEVELOPMENTS AND NPAs
The core banking business is of mobilizing the deposits and utilizing it for lending to industry. Lending business is generally encouraged because it has the effect of funds being transferred from the system to productive purposes, which results into economic growth.
However lending also carries credit risk, which arises from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation.
A question that arises is how much risk can a bank afford to take? Recent happenings in the business world -Enron, WorldCom, Xerox, Global Crossing do not give much confidence to banks. In case after case, these giant corporate becan1e bankrupt and failed to provide investors with clearer and more complete information thereby introducing a degree of risk that many investors could neither anticipate nor welcome. The history of financial institutions also reveals the fact that the biggest banking failures were due to credit risk. Due to this, banks are restricting their lending operations to secured avenues only with adequate collateral on which to fall back upon in a situation of default.