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.
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
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
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.
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.
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.
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.
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.
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.
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.
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.
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
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''
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.
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.
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."