A study made by the Reserve Bank of India states that, compared to other Asian countries and the US, the gross non-performing asset figures in India seem more alarming than the net NPA figure.

The gross NPAs as a percentage of total advances among Indian banks today is around 16 per cent while the net NPAs as a percentage of net advances are around 8 per cent. Net NPAs are arrived at after creation of provision on gross NPAs.

The problem of high gross NPAs is simply one of inheritance. Historically, Indian public sector banks have been poor on credit recovery, mainly because of very little legal provision governing foreclosure and bankruptcy, lengthy legal battles, sticky loans made to government public sector undertakings, loan waivers and priority sector lending.

Why are the net NPAs comparatively better on a global basis? It''s because of the stringent provisioning norms that have been followed by banks ever since the Narasimham Committee recommendations on this matter were prescribed for banks in 1991.

In India, owing to the time lag involved in the recovery, banks tend to hold on to advances considered irrecoverable in their books. In a normal scenario these should be completely written off from the books. This gives birth to what are termed gross NPAs.

An NPA is a loan for which the interest or the principal or both remain unpaid for two quarters or more.Valuation of NPAs differ from country to country. Banks in some countries provide for NPAs as a general provision and write off losses by identifying them at an early stage. In such countries, banks would carry very little NPAs in their books since recovery measures are expedited so as to avoid bankruptcy.

Gross NPA and Net NPA is absent in these countries. Further, NPA norms are framed in countries in different ways since each country has its own uniqueness and peculiarities in its banking systems.

Countries have put in place norms in accordance with their requirements and in a majority of developing countries, stringent norms do not exist. On an average, Indian provisioning norms are considered reasonable. This is why net NPAs in India are comparatively better on a global basis.

Banks in some countries treat an advance as ''un-collectable'' and classify it as a ''loss'' only after it remains due or doubtful over a certain period. In some others, the ''secured'' amount is deducted from the ''doubtful'' advance to arrive at the net doubtful amount.

In India, even on security taken against loans, provision has to be created. Further, Indian banks have to make a 100 per cent provision on the amount not covered by the realisable value of securities in case of ''doubtful'' advance, while in some countries, it is 75 per cent or just 50 per cent.

The definition of the term ''collateral'' also differs from country to country. Security given on a standby basis, like a third party guarantee of promoter guarantee, or the net worth of the promoter or guarantor, are not considered as security in India.

According to the RBI, to improve the organisational efficiency of banks, reduction of NPAs has been identified as the most critical area. This would result in improved profitability of banks.

Internal factors that cause a deterioration in NPA levels in banks could be poor credit appraisal, wilful default by debtors or non-compliance. It has also to be accepted that external factors such as a tendency to lend to certain traditional industries, most of which are suffering losses, natural calamities, policy and technological changes that increase the risk of sickness, labour problems and non-availability of raw materials are factors outside the realm of banks'' control.

The RBI feels that banks should at least try and immediately focus on minimising the risk of increasing their NPAs by keeping stringent control on the internal factors. For this, banks have to aggressively take legal actions, improve their credit appraisal skills and effect methods for recoveries duly. The RBI has also called for changes in the laws relating to making the recovery process more smooth and less time consuming, creation of alternative channels for debt recovery -- as means to help bring about a reduction in NPAs.

''Lok adalats'' (literally meaning "people''s courts") have helped in quick recovery of small loans. They complement the efforts of the government''s debt recovery tribunals. The Asset Reconstruction Company that has been set up will also play a vital role in reduction of NPAs. All these measures would provide necessary liquidity to banks through the securitisation of banks'' loan assets.

According to the RBI, "Reduction of NPAs in the Indian banking sector should be treated as a national priority item to make the system stronger, resilient and geared to meet the challenges of globalisation. It is necessary that a public debate is started soon on the problem of NPAs and their resolution."