Financial sector reform in India has progressed rapidly on aspects like interest rate deregulation, reduction in reserve requirements, barriers to entry, prudential norms and risk-based supervision. But progress on the structural-institutional aspects has been much slower and is a cause for concern. The sheltering of weak institutions while liberalizing operational rules of the game is making implementation of operational changes difficult and ineffective. Changes required to tackle the NPA problem would have to span the entire gamut of judiciary, polity and the bureaucracy to be truly effective. This paper deals with the experiences of other Asian countries in handling of NPAs. It further looks into the effect of the reforms on the level of NPAs and suggests mechanisms to handle the problem by drawing on experiences from other countries.
After nationalization, the initial mandate that banks were given was to expand their branch network, increase the savings rate and extend credit to the rural and SSI sectors1. This mandate has been achieved admirably. Since the early 90’s the focus has shifted towards improving quality of assets and better risk management. The ‘directed’ lending approach has given way to more market driven practices. The Narasimhan Committee has recommended prudential norms on income recognition, asset classification and provisioning. In a change from the past, Income recognition is now not on an accrual basis but when it is actually received. Past problems faced by banks were to a great extent attributable to this. Classification of what an NPA is has changed with tightening of prudential norms. Currently an asset is “non-performing” if interest or installments of principal due remain unpaid for more than 180 days.
An asset becomes Non-performing when it ceases to generate income for a Bank
It is also defined as credit facility in respect of which the interest and/or instalments of principal has remained ‘ past due’ for a specified period of time. The specified period of time is “ two quarters”.
An amount due under any credit facility is treated as “ past due” when it has not been paid within 30 days from the due date.
With the advancement in technology and improvement in payment and settlement system, the past due concept have been dispensed off w. e. f 31st march, 2002 accordingly a Non-performing Assets shall be treated as an advance where: Interest and/or instalments of principal remain overdue for a period of more than 180 days in respect of a Term Loan i.e. two quarters. The account remains ‘out of order’ for a period of more than 180 days, in respect of an Overdraft/ Cash Credit. The bill remains overdraft for a period of more than 180 days in the case of bills purchased and discounted. Interest and/or instalments of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes. Any amount to be received overdue for a period of more than 180 days in respect of other accounts. As a step forward towards international best practices and to ensure greater transparency, it has been decided to adopt the’90 days overdue norm for identification of NPA’ s from the year ending March31, 2004 accordingly a NPA shall be a loan or an advance where: Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,
The account remains ‘out of order’ for a period of more than 90 days in the respect of an Overdraft/ Cash Credit. The bill remains overdue for a period of more than 90 days in the case of bills purchased or discounted.
Interest and/or instalments of principal remains overdue for two harvest seasons but for a period not...