Problem and solution to the case of increasing non-performing Assets in

India

ABSTRACT
The Indian banking Sector has been facing serious problems of raising Non-performing Assets. The
NPAs growth has a direct on the profitability of banks. Non-performing assets are one of the major
concerns for scheduled commercial banks in India. The recommendations of Narsimhan Committee
and Verma Committee had taken few steps to solve the problem of old NPAs in the balance sheet of
banks. There seems to be no unanimity in the proper policies to be followed in resolving the concerned
problem. NPAs reflects directly in the performance of banks. There is a direct relation between NPAs
and high profitability with a large number of credit defaults that affect the net-worth of the banks and
also erodes the value of assets. It affects the liquidity and profitability, in addition to incur threat on
quality of assets and survival of banks. The incumbent problem of NPAs doesn’t only affect the banking
sector but also the whole economy. It is pertinent to assert the fact that the high level of NPAs in
Indian banks is nothing but a counter reflection of the state of health of the industry & trade. It is
necessary to surmount NPAs to improve the financial health in the banking system. NPAs increases
risk perception and thereby liquidity positions of the bank. This paper attempts to first examine the
level of NPAs in the banking sector in India and then analysing the causes for increasing NPAs. This
Paper also emphasis on the comparison of the performance of public sector banks with the private
sector banks also cases related to NPAs and debt recovery in the present day scenario and the
solutions ought to it. Moreover, it also focuses on Section 29A of Insolvency and Bankruptcy Code
which put bar on the selection of resolution applicant to put forward resolution plan to resolution
professional with an affected role of NPA.

INTRODUCTION
The banking system is the genesis of the financial system. The most crucial function of the financial
system is the mobilization of the public savings and its allocation in different sectors of the economy
as an investment. The conversion of financial savings in to investment is known as the process of
capital formation in the economy. How the process of financial intermediation (i.e. collecting scattered
savings and using it in to productive purposive) is carried out shall reflect the efficiency of the financial
institutions and their role in socio-economic transformation of the country.

Asset quality was not the only concern in Indian banking sector till 1991, but it was mainly focused on
performance objectives such as opening wide network/branches, development of rural areas, priority
sector lending, higher employment generation, etc. whereas the primary function of banks is to lend
funds as loans to various sectors such as agriculture, industry, personal loans, housing loans etc., but
in the recent past the banks have become very cautious in extending loans. The reason being mounting
NPA. Bankers are the custodian and disburser of the liquid capital of the country. Therefore, it is
considered to be the most important function of the banking system is to mobilize the savings of the
person by accepting deposits from the public. The banker becomes the trustee of the surplus balances
of the public.

The Non-Performing Asset (NPA) concept is restricted to loans, advances & investment. As long as an
asset generates the income expected from it and does not disclose any unusual risk other than normal
commercial risk, it is treated as performing asset, and when it fails to generate the expected income
it becomes a “Non-performing Asset”.

In the subsequent manner, a long asset becomes a Non-Performing Asset (NPA) when it ceases to
generate income, i.e., interest, fees, commissions or any other dues for the bank for than 90 days. An
NPA is an advance where payment of interest or repayment of installment on principal or both remains
unpaid any of the credit facilities is to be treated as past due when it remains unpaid for 30 days
beyond due date.

NPA are also called Non-performing Loans. It is constructed by a bank or finance company on which
repayment or interest payment are not being paid on time. A loan is an asset for a bank as the interest
payments and the principal create a stream of cash flows. It is through the interest payments that a
bank makes its profits. Banks usually treat assets as non-performing if they are not serviced for some
time period. If the payment is late for a short time, a loan is classified as past due and once a payment
become later (usually 90 days), the loan is classified as non-performing. A high level of nonperforming
assets compared to similar lenders becomes a problem.

Narasimhan Committee that mandated identification & reduction of NPAs to be treated as a national
priority because NPA direct toward credit risk that faces and its efficiency in allocating resources.
Profitability and earnings of banks are affected due to NPA numbers. A quick glance on the numbers
of non-performing assets in the year 1995 it was Rs. 33885 crore and reached to 71047 crores in 2011
in public sector banks and comparatively in the year 2001 the NPAs were Rs. 6410 crore and reached
to Rs. 17972 Crore in 2011 in Private sector banks.