NPAs improve, but need more attention

S Lakshmi Narasimhan
30 July 1999

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.