Non-Performing Assets of Public and Private Sector Banks
The quality of Indian banks’ assets is likely to deteriorate over the next two years. This will be driven by the slowdown in the economy, and by the aging of loans made in recent years. The NPAs are considered as an important parameter to judge the performance and financial health of banks. The level of NPAs is one of the drivers of financial stability and growth of the banking sector. The Financial companies and institutions are nowadays facing a major problem of managing the Non Performing Assets (NPAs) as these assets are proving to become a major setback for the growth of the economy. NPAs in simple words may be defined as the borrower does not pay principal and interest for a period of 180 days. However, it is taken into consideration now that default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facility granted by the bank to a borrower becomes non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact that there may still exists certain advances / credit facilities having performing status. Asset Classification
Categories of NPAs
Standard assets are the ones in which the bank is receiving interest as well as the principal amount of the loan regularly from the customer. Here it is also very important that in this case the arrears of interest and the principal amount of loan do not exceed 90 days at the end of financial year. If asset fails to be in category of standard asset that is amount due more than 90 days then it is NPA and NPAs are further need to classify in sub categories. Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues: (1) Sub-standard Assets
(2) Doubtful Assets
(3) Loss Assets
(1) Sub-standard Assets:--
With effect from 31 March 2005, a sub standard asset would be one, which has remained NPA for a period less than or equal to 12 month. The following features are exhibited by sub standard assets: the current net worth of the borrowers / guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full; and the asset has well-defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. (2) Doubtful Assets:--
A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, – on the basis of currently known facts, conditions and values – highly questionable and improbable. With effect from March 31, 2005, an asset would be classified as doubtful if it remained in the sub-standard category for 12 months. (3) Loss Assets:--
A loss asset is one which considered uncollectible and of such little value that its continuance as a bankable asset is not warranted- although there may be some salvage or recovery value. Also, these assets would have been identified as ‘loss assets’ by the bank or internal or external auditors or the RBI inspection but the amount would not have been written-off wholly. Factors for Rise in NPAs:-
The banking sector has been facing the serious problems of the rising NPAs. But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks. The NPAs in PSB are growing due to external as well as internal factors. External Factors:-
- Ineffective Recovery Tribunal
The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances. Due to their negligence and ineffectiveness in...
Bibliography: 1. Bhalla V. K. (2001), Financial Management & Policy IInd Edition, Anmol Publications, New Delhi
2. Prasanna Chandra (1999), Financial Management, Tata McGraw Hill, New Delhi.
3. Rastogi R. P. (2002), Financial Management, Galgotia Publication, New Delhi.
4. Sharma & Gupta (2001), Financial Management, Kalyani Publication, New Delhi.
5. Pandey I. M. (2003), Financial Management, Vikas Publication House, New Delhi.
6. IBA Bulletin, Monthly Journal Published by the Indian banks Associations May 2005, Vol XXVI No. 5, IBA Bulletin, Monthly Journal Published by the Indian banks Associations.
Please join StudyMode to read the full document