CHAPTER I

INTRODUCTION AND RESEARCH

DESIGN

1.1 Introduction
1.2 Objectives of the study
1.3 Hypothesis of the study
1.4 Significance of the Study
1.5 Statement of the Problem
1.6 Scope of the study
1.7 Methods of Data collection
1.8. Methods of Data Analysis
1.9 Limitations of study
1.10 Conclusion

[Type text] Page 1

 CHAPTER I
INTRODUCTION AND RESEARCH

DESIGN

1.1 INTRODUCTION

Non-performing assets (NPAs) have become a major concern for banks across
the world, including Union Bank of India. NPAs are loans and advances that are not
repaid by the borrower for a certain period of time, usually 90 days or more. The
problem of NPAs impacts the profitability and financial stability of the bank, as the
bank has to make provisions for the bad debt. Therefore, effective management of
non-performing assets is crucial for banks to maintain their financial health.

The aim of this research methodology project is to study the problem of non-
performing assets with reference to Union Bank of India. Specifically, the project will
seek to identify the factors that contribute to the problem of non-performing assets,
analyze the strategies used by Union Bank of India to manage NPAs, and evaluate the
effectiveness of these strategies in reducing the level of non-performing assets..

MEANING OF NPA’s:

An asset is classified as non-performing asset (NPA’s) if dues in the form of

principal and interest are not paid by the borrower for a period of 180 days. However
with effect from March 2004, default status would be given to a borrower if dues are
not paid for 90 days. If any advance or credit facilities granted by bank to a borrower
become 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 exist certain advances / credit facility.

[Type text] Page 2

NPA IN INDIAN BANKING SYSTEM:

NPA surfaced suddenly in the Indian banking scenario, around the Eighties, in
the midst of turbulent structural changes overtaking the international banking
institutions, and when the global financial markets were undergoing sweeping
changes. In fact after it had emerged the problem of NPA kept hidden and gradually
swelling unnoticed and unperceived, in the maze of defective accounting standards
that still continued with Indian Banks up to the Nineties and opaque Balance sheets.

In a dynamic world, it is true that new ideas and new concepts that emerge
through such changes caused by social evolution bring beneficial effects, but only
after levying a heavy initial toll. The process of quickly integrating new innovations
in the existing set-up leads to an immediate disorder and unsettled conditions. People
are not accustomed to the new models. These new formations take time to
configure, and work smoothly. The old is cast away and the new is found difficult to
adjust. Marginal and sub-marginal operators are swept away by these convulsions.
Banks being sensitive institutions entrenched deeply in traditional beliefs and
conventions were unable to adjust themselves to the changes. They suffered easy
victims to this upheaval in the initial phase.

Consequently banks underwent this transition-syndrome and languished under

distress and banking crises surfaced in quick succession one following the other in
many countries. But when the banking industry in the global sphere came out of this
metamorphosis to re-adjust to the new order, they emerged revitalized and as more
vibrant and robust units. Deregulation in developed capitalist countries particularly in
Europe, witnessed a remarkable innovative growth in the banking industry, whether
measured in terms of deposit growth, credit growth, growth intermediation
instruments as well as in network.

During all these years the Indian Banking, whose environment was insulated
from the global context and was denominated by State controls of directed credit
delivery, regulated interest rates, and investment structure did not participate in this
vibrant banking revolution. Suffering the dearth of innovative spirit and choking
under undue regimentation, Indian banking was lacking objective and prudential
systems of business leading from early stagnation to eventual degeneration and

[Type text] Page 3

reduced or negative profitability. Continued political interference, the absence of
competition and total lack of scientific decision-making, led to consequences just the
opposite of what was happening in the western countries. Imperfect accounting
standards and opaque balance sheets served as tools for hiding the shortcomings and
failing to reveal the progressive deterioration and structural weakness of the country's
banking institutions to public view. This enabled the nationalized banks to continue to
flourish in a deceptive manifestation and false glitter, though stray symptoms of the
brewing ailment were discernable here and there.

The government hastily introduced the first phase of reforms in the financial
and banking sectors after the economic crisis of 1991. This was an effort to quickly
resurrect the health of the banking system and bridge the gap between Indian and
global banking development. Indian Banking, in particular PSB’s suddenly woke up
to the realities of the situation and to face the burden of the surfeit of their woes.
Simultaneously major revolutionary transitions were taking place in other sectors of
the economy on account the ongoing economic reforms intended towards freeing the
Indian economy from government controls and linking it to market driven forces for a
quick integration with the global economy. Import restrictions were gradually freed.
Tariffs were brought down and quantitative controls were removed. The Indian
market was opened for free competition to the global players. The new economic
policy in turn revolutionaries the environment of the Indian industry and business and
put them to similar problems of new mixture of opportunities and challenges. As a
result we witness today a scenario of banking, trade and industry in India, all
undergoing the convulsions of total reformation battling to kick off the decadence of
the past and to gain a new strength and vigor for effective links with the global
economy. Many are still languishing unable to get released from the old set-up, while
a few progressive corporate are making a niche for themselves in the global context.

During this decade the reforms have covered almost every segment of the
financial sector. In particular, it is the banking sector, which experienced major
reforms. The reforms have taken the Indian banking sector far away from the days of
nationalization. Increase in the number of banks due to the entry of new private and
foreign banks; increase in the transparency of the banks' balance sheets through the
introduction of prudential norms and norms of disclosure; increase in the role of the

[Type text] Page 4

market forces due to the deregulated interest rates, together with rapid
computerization and application of the benefits of information technology to banking
operations have all significantly affected the operational environment of the Indian
banking sector.

In the background of these complex changes when the problem of NPA was
belatedly recognized for the first time at its peak velocity during 1992-93, there was
resultant chaos and confusion. As the problem in large magnitude erupted suddenly
banks were unable to analyze and make a realistic or complete assessment of the
surmounting situation. It was not realized that the root of the problem of NPA was
centered elsewhere in multiple layers, as much outside the banking system, more
particularly in the transient economy of the country, as within. Banking is not a
compartmentalized and isolated sector delinked from the rest of the economy. As has
happened elsewhere in the world, a distressed national economy shifts a part of its
negative results to the banking industry. In short, banks are made ultimately to finance
the losses incurred by constituent industries and businesses. The unprepared ness and
structural weakness of our banking system to act to the emerging scenario and de-risk
itself to the challenges thrown by the new order, trying to switch over to globalization
were only aggravating the crisis. Partial perceptions and hasty judgments led to a
policy of ad-hoc-ism, which characterized the approach of the authorities during the
last two-decades towards finding solutions to banking ailments and dismantling
recovery impediments. Continuous concern was expressed. Repeated correctional
efforts were executed, but positive results were evading. The problem was defying a
solution.

The threat of NPA was being surveyed and summarized by RBI and
Government of India from a remote perception looking at a bird's-eye-view on the
banking industry as a whole delinked from the rest of the economy. RBI looks at the
banking industry's average on a macro basis, consolidating and tabulating the data
submitted by different institutions. It has collected extensive statistics about NPA in
different financial sectors like commercial banks, financial institutions, urban
cooperatives, NBFC etc. But still it is a distant view of one outside the system and not
the felt view of a suffering participant. Individual banks inherit different cultures and
they finance diverse sectors of the economy that do not possess identical attributes.

[Type text] Page 5

There are distinct diversities as among the 29 public sector banks themselves,
between different geographical regions and between different types of customers
using bank credit. There are three weak nationalized banks that have been identified.
But there are also correspondingly two better performing banks like Corporation and
OBC. There are also banks that have successfully contained NPA and brought it to
single digit like Syndicate (Gross NPA 7.87%) and Andhra (Gross NPA 6.13%). The
scenario is not so simple to be generalized for the industry as a whole to prescribe a
readymade package of a common solution for all banks and for all times.

Similarly NPA concerns of individual Banks summarized as a whole and

expressed as an average for the entire bank cannot convey a dependable picture. It is
being statistically stated that bank X or Y has 12% gross NPA. But if we look down
further within that Bank there are a few pockets possessing bulk segments of NPA
ranging 50% to 70% gross , which should consequently convey that there should also
be several other segments with 3 to 5% or even NIL % NPA, averaging the bank's
whole performance to 12%. Much criticism is made about the obligation of
Nationalized Banks to extend priority sector advances. But banks have neither fared
better in non-priority sector. The comparative performance under priority and non-
priority is only a difference of degree and not that of kind.

The assessment of the mix-of contributing factors includes:

1. human factors (those pertaining to the bankers and the credit customers),
2. environmental imbalances in the economy on account of wholesale changes
and also
3. Inherited problems of Indian banking and industry.

Variable skill, efficiency and level integrity prevailing in different branches and in
different banks accounts for the sweeping disparities between inter-bank and intra-
bank performance. We may add that while the core or base-level NPA in the industry
is due to common contributory causes, the inter-se variations are on account of the
structural and operational disparities. The heavy concentrated prevalence of NPA is
definitely due to human factors contributing to the same.

[Type text] Page 6

No bank appears to have conducted studies involving a cross-section of its operating
field staff, including the audit and inspection functionaries for a candid and
comprehensive introspection based on a survey of the variables of NPA burden under
different categories of sectorial credit, different regions and in individual Branches
categorized as with high, medium and low incidence of NPA. We do not hear the
voice of the operating personnel in these banks candidly expressed and explaining
their failures. Ex-bankers, i.e. the professional bankers who have retired from service,
but possess a depth of inside knowledge do not out-pour candidly their views. After
three decades of nationalized banking, we must have some hundreds of retired Bank
executives in the country, who can boldly and independently, but objectively voice
their views. Everyone is satisfied in blaming the others. Bank executives hold 'willful
defaulters' responsible for all the plague. Industry and business blames the
government policies.

Important fact-revealing information for each NPA account is the gap period
between the date, when the advance was originally made and the date of its becoming
NPA. If the gap is long, it is the case of a sunset industry. Things were all right
earlier, but economic variance in trade cycles or market sentiments have created the
NPA. Credit customers who are in NPA today, but for years were earlier rated as
good performers and creditworthy clients ranging within the top 50 or 100.
Significant part of the NPA is on account of clout banking or willfully given bad
loans. Infant mortality in credit is solely on account of human factors and absence of
human integrity.

Credit to different sectors given by the PSB’s in fact represents different

products. Advance to weaker sections below Rs.25000/- represents the actual social
banking. NPA in this sector forms 8 TO 10% of the gross amount. Advance to
agriculture, SSI and big industries each calls for different strategies in terms of credit
assessment, credit delivery, project implementation, and post advance supervision.
NPA in different sector is not caused by the same resultant factors. Containing
quantum of NPA is therefore to be programmed by a sector-wise strategy involving a
role of the actively engaged participants who can tell where the boot pinches in each
case. Business and industry has equal responsibility to accept accountability for

[Type text] Page 7

containment of NPA. Many of the present defaulters were once trusted and valued
customers of the banks. Why have they become unreliable now, or have they?

The credit portfolio of a nationalized bank also includes a number of low-risk

and risk-free segments, which cannot create NPA. Small personal loans against banks'
own deposits and other tangible and easily marketable securities pledged to the bank
and held in its custody are of this category. Such small loans are universally given in
almost all the branches and hence the aggregate constitutes a significant figure. Then
there is food credit given to FCI for food procurement and similar credits given to
major public Utilities and Public Sector Undertakings of the Central Government. It is
only the residual fragments of Bank credit that are exposed to credit failures and
reasons for NPA can be ascertained by scrutinizing this segment.

Secondly NPA is not a dilemma facing exclusively the Bankers. It is in fact an

all pervasive national scourge swaying the entire Indian economy. NPA is a sore
throat of the Indian economy as a whole. The banks are only the ultimate victims,
where life cycle of the virus is terminated.

Now, how does the Government suffer? What about the recurring loss of
revenue by way of taxes, excise to the government on account of closure of several
lakhs of erstwhile vibrant industrial units and inefficient usage of costly industrial
infrastructure erected with considerable investment by the nation? As per statistics
collected three years back there are over two and half million small industrial units
representing over 90 percent of the total number of industrial units. A majority of the
industrial work force finds employment here and the sector's contribution to industrial
output is substantial and is estimated at over 35 percent while its share of exports is
also valued to be around 40 percent. Out of the 2.5 million, about 10% of the small
industries are reported to be sick involving a bank credit outstanding around Rs.5000
to 6000 Cores, at that period. It may be even more now. These closed units represent
some thousands of displaced workers previously enjoying gainful employment. Each
closed unit whether large, medium or small occupies costly developed industrial land.
Several items of machinery form security for the NPA accounts should either be lying
idle or junking out. In other words, large value of land, machinery and money are
locked up in industrial sickness. These are the assets created that have turned
unproductive and these represent the real physical NPA, which indirectly are reflected
[Type text] Page 8
in the financial statements of nationalized banks, as the ultimate financiers of these
assets. In the final analysis it represents instability in industry. NPA represents the
owes of the credit recipients, in turn transferred and parked with the banks.

Recognizing NPA as a sore throat of the Indian economy, the field level
participants should first address themselves to find the solution. Why not
representatives of industries and commerce and that of the Indian Banks' Association
come together and candidly analyze and find an everlasting solution heralding the real
spirit of deregulation and decentralization of management in banking sector, and
accepting self-discipline and self-reliance? What are the deficiencies in credit delivery
that leads to its misuse, abuse or loss? How to check misuse and abuse at source?
How to deal with erring Corporate? In short, the functional staff of the Bank along
with the representatives of business and industry has to accept a candid introspection
and arrive at a code of discipline in any final solution. And preventive action to be
successful should start from the credit-recipient level and then extend to the bankers.
RBI and Government of India can positively facilitate the process by providing
enabling measures. Do not try to set right industry and banks, but help industry and
banks to set right themselves. The new tool of deregulated approach has to be
accepted in solving NPA.

[Type text] Page 9

1.2 Objectives of the study

 To study the meaning of NPAs.

 To examine the causes of NPAs and understand the factors that contributes to
the problem.
 To evaluate the impact of NPAs on the financial performance and stability of
banks.
 To identify the factors that influences the recovery of NPAs, such as loan
restructuring and the implementation of the Insolvency and Bankruptcy Code.
 To evaluate the effectiveness of various strategies and policies those have
been implemented to reduce the level of NPAs.
 To make recommendations for improving the management of NPAs and
enhancing the resilience of the banking sector to the risk of NPAs.
 To provide insights into best practices in the management of NPAs, and to
share lessons learned with policymakers and other stakeholders.

1.3 Hypothesis of the study

The following hypotheses have been set by the researcher for the study.

1. H1): NPA has significant impact on banks financial performance.

2. (H0): NPA has no significant impact on banks financial performance.

1.4 Significance of the study

1. Understanding NPA trends: The study will help understand the trends in NPAs
of Union Bank of India and the factors that are contributing to them.

2. Improving financial performance: By analyzing the trends and causes of

NPAs, the study can help Union Bank of India identify areas for improvement
and take proactive steps to reduce its NPA levels, thereby improving its
financial performance.

3. Risk management: The study will provide insights into the quality of risk
management processes of Union Bank of India and the effectiveness of its
efforts to mitigate the risks associated with NPAs.

[Type text] Page 10

 4. Best practices: The study may provide best practices for managing NPAs that
can be adopted by Union Bank of India and other banks to improve their
financial performance.

5. Industry knowledge: The study will contribute to the overall understanding of

NPAs in the banking sector and the efforts taken by banks to reduce their NPA
levels.

Overall, the project can help Union Bank of India make data-driven decisions
to improve its financial performance and reduce the impact of NPAs on its bottom
line.

1.5 Statement of the Problem

"Non-performing assets (NPAs) are a major challenge for the banking

industry, including Union Bank of India. Despite efforts to mitigate NPAs, their levels
remain high, impacting the bank's financial performance and putting pressure on its
profitability. The reasons for the high levels of NPAs and the impact of various
internal and external factors on Union Bank of India's NPA situation are not fully
understood. The purpose of this study is to analyze the trends in NPAs and identify
the key factors contributing to them, with the aim of improving Union Bank of India's
financial performance and reducing the impact of NPAs on its bottom line."

1.6 Scope of the study

1. NPA Trends: The study will analyze the trends in NPAs of Union Bank of
India over a specified period of time to understand the evolution of NPA
levels.
2. Factors contributing to NPAs: The study will identify and analyze the key
internal and external factors that are contributing to the high levels of NPAs in
Union Bank of India.
3. Risk management processes: The study will examine the quality of risk
management processes at Union Bank of India and evaluate their effectiveness
in mitigating NPA risk.
4. Data analysis: The study will use statistical analysis techniques to draw
conclusions about the relationships between NPAs and various internal and
external factors.

[Type text] Page 11

 5. Recommendations: Based on the findings, the study will provide
recommendations for Union Bank of India to reduce its NPA levels and
improve its financial performance.

The scope of the study may be limited to a specific geographic region, product
line, or time period. The scope should be defined clearly to ensure that the objectives
of the study can be achieved within the available resources.

1.7 Methods of data collection

Secondary Data Collection methods are used for collecting data in this project.
Secondary data is data collected by someone other than the actual user. It
means that the information is already available, and someone analyses it. The
secondary data includes magazines, newspapers, books, journals, etc. It may be either
published data or unpublished data.
Published data are available in various resources including

 Government publications
 Public records
 Historical and statistical documents
 Business documents
 Technical and trade journals
Unpublished data includes

 Diaries
 Letters
 Unpublished biographies, etc.

Sampling-
Sample used for the project report is the UNION BANK OF INDIA

The sampling method used for collecting data is convenient sampling, the information
selected by researcher conveniently with references and observations

[Type text] Page 12

1.8. Methods of Data Analysis

1. Descriptive statistics: Descriptive statistics such as mean, median and standard

deviation will be used to summarize the data on NPAs and various internal
and external factors contributing to them.

2. Time series analysis: Time series analysis will be used to analyze the trends in
NPAs over a specified period of time and identify the key factors that have
influenced these trends.

3. Correlation analysis: Correlation analysis will be used to determine the

relationships between NPAs and various internal and external factors and
evaluate the strength of these relationships.

4. Regression analysis: Regression analysis will be used to identify the most

significant factors contributing to NPAs and to estimate the impact of these
factors on Union Bank of India's NPA situation.

5. Factor analysis: Factor analysis will be used to reduce the number of variables
and identify the underlying dimensions that contribute to the NPA situation at
Union Bank of India.

6. Cluster analysis: Cluster analysis can be used to group Union Bank of India's
customers and assets based on their NPA risk and evaluate the impact of
various internal and external factors on these groups.

7. ANOVA is a statistical method used to test the differences in means between

two or more groups. In the context of the project, ANOVA can be used to test
the differences in NPAs between different groups, such as regions, product
lines, or customer segments.

For example, ANOVA can be used to test the hypothesis that the mean
NPAs of Union Bank of India in different regions are equal, or that the mean
NPAs of different product lines are equal. By comparing the variance between
the groups and the variance within the groups, ANOVA can determine if there
is a significant difference in the means of the groups and which groups are
significantly different from each other. ANOVA can be used in conjunction
with other methods of data analysis, such as regression analysis or factor
analysis, to provide a comprehensive understanding of the NPA situation at
Union Bank of India and the impact of various internal and external factors on
it.

[Type text] Page 13

1.9 Limitations of study
1. Data availability: The study may be limited by the availability of data on
NPAs and various internal and external factors that contribute to them. There
may be difficulties in obtaining accurate and complete data from Union Bank
of India and other sources.

2. Time frame: The study may be limited by the time frame considered, as
changes in the NPA situation and the impact of various internal and external
factors on NPAs may occur over time.

3. Generalizability: The results of the study may not be generalizable to other

banks, as the NPA situation at Union Bank of India may be unique to the bank
and its operations.

4. Selection bias: The sample of customers and assets used in the study may not
be representative of the entire population, leading to selection bias and
affecting the validity of the results.

5. Causality: The study may not be able to establish causality between NPAs and
various internal and external factors, as there may be other factors not
considered in the study that influence NPAs.

6. Endogeneity: The study may be affected by endogeneity, where the

independent variables and the dependent variable may be influenced by the
same underlying factors, leading to biased results.

7. This study is only restricted to Union Bank of India only.

8. The result of the study may not be applicable to any other banks.

9. Since the part of the study is based on their perceptions, the findings
may change over the years in keeping with changes in environmental
factor.

Despite these limitations, the study will provide valuable insights into the
NPA situation at Union Bank of India and the impact of various internal and external
factors on NPAs, which can be used by the bank to improve its financial performance
and reduce its NPAs.

[Type text] Page 14

1.10 Conclusion
1. Key findings: The study found that the levels of NPAs at Union Bank of India
are high, and the impact of the bank's policies on NPAs is significant. The
study analyzed the effectiveness of the bank's policies in reducing NPAs and
identified opportunities for improvement.

2. Recommendations: The study recommends that Union Bank of India review

and revise its policies to ensure they are effectively reducing NPAs. This
could include improving loan underwriting policies, strengthening loan
recovery policies, and enhancing risk management policies.

3. Limitations: The study acknowledges the limitations of the study, including

data availability, time frame, generalizability, selection bias, causality, and
endogeneity.

4. Future research: The study suggests that further research could be conducted
to further explore the NPA situation at Union Bank of India and other banks,
and to identify more effective policies for reducing NPAs.

The conclusion of the study will provide valuable insights into the impact of
policies on the NPA situation at Union Bank of India and the opportunities for
improvement, which can be used by the bank to improve its financial performance
and reduce its NPAs.

[Type text] Page 15

 Chapter – II

THEROTICAL BACKGROUND

2.1 Introduction
2.2 Types of NPA
2.3 Reasons of NPA
2.4 Impact of NPA
2.5 Regulatory Framework
2.6 Strategies for NPA Management
2.7 Current Trends and Challenges
2.8 Conclusion

[Type text] Page 16

 Chapter – II

THEROTICAL BACKGROUND

2.1 Introduction

Non-performing assets (NPAs) have become a significant issue for the

banking sector in recent years, affecting the financial health of banks and their ability
to lend, and the overall economy. In this study, we will focus on Union Bank of India,
one of the leading public sector banks in India, to analyze the issue of NPAs and its
impact on the bank.

The banking sector is a crucial component of any economy, and its stability
and growth are essential for the overall economic development of a country.
However, the issue of NPAs has been a significant concern for the banking sector in
India for several years. The magnitude of NPAs has been increasing steadily, which
has led to a decline in the profitability of banks, increased provisioning requirements,
and a decrease in lending activities.

Union Bank of India, being one of the leading public sector banks in India, has
also been impacted by the issue of NPAs. The bank has been actively working
towards reducing its NPA levels and improving its asset quality. However, it is
essential to understand the underlying causes of NPAs and their impact on Union
Bank of India to develop effective strategies for managing them.

Therefore, the study aims to analyze the issue of NPAs and its impact on
Union Bank of India. The study will use a combination of qualitative and quantitative
research methods to collect and analyze data. The study will focus on the following
objectives:

1. To analyze the trends and patterns of NPAs in Union Bank of India over the
years.

2. To identify the factors contributing to the rise in NPAs in Union Bank of

India.

3. To assess the impact of NPAs on the financial performance of Union Bank of

India.

[Type text] Page 17

 4. To suggest measures for reducing NPAs and improving the asset quality of
Union Bank of India.

The study is expected to provide valuable insights into the issue of NPAs and
its impact on Union Bank of India. The findings of the study can be used by the
management of the bank to develop effective strategies for managing NPAs and
improving its asset quality. The study can also be useful for policymakers and
regulators in the banking sector to develop policies and guidelines to address the issue
of NPAs in the banking sector.

2.1 Types of NPA

Non-Performing Assets (NPAs) are loans or advances that have

stopped performing, which means that the borrower has stopped paying
interest or principal, or both. NPAs are a major problem for banks and
financial institutions because they have a significant impact on their
balance sheets and profitability. There are different types of NPAs based
on the length of time they have been non-performing and the likelihood
of recovery.

The Reserve Bank of India (RBI) has defined the following

categories of NPAs:

1. Substandard assets: These are assets that are non-

performing for more than 90 days. Substandard assets have some
potential to recover, but they carry a high degree of risk. Banks must
make provisions against these assets, which means that they have to set
aside money to cover potential losses.

2. Doubtful assets: These are assets that have been non-

performing for more than 1 year. The possibility of recovery of such
assets is uncertain and depends on the outcome of pending legal or other
proceedings. Banks must make higher provisions against these assets
compared to substandard assets.

3. Loss assets: These are assets that are considered

uncollectible and are written off. The loss is a result of the bank or
financial institution's own assessment that the borrower has no capacity
to pay, and the collateral value is nil. Banks must fully write off such
assets and make provisions against them.

NPAs can also be classified based on the nature of security

against them. There are two types of NPAs in this category:

1. Secured NPAs: These are NPAs where the bank or

financial institution has a collateral or security against the loan. The
collateral can be sold to recover the amount of the loan. Banks must

[Type text] Page 18

value the collateral and make provisions against the shortfall between
the value of the collateral and the outstanding loan amount.

2. Unsecured NPAs: These are NPAs where there is no

collateral or security against the loan. The recovery of such assets is
entirely dependent on the borrower's willingness to pay. Banks have
limited options for recovery in such cases.

Banks and financial institutions use different methods to manage

their NPAs. Some of the methods include restructuring, recovery
through legal action, sale to asset reconstruction companies, and write-
off. Let's take a closer look at each of these methods:

1. Restructuring: This is a method where the bank or

financial institution renegotiates the loan terms with the borrower to
make it easier for them to repay. This could include extending the loan
repayment period, reducing the interest rate, or converting part of the
loan into equity. The objective of restructuring is to avoid the loan
becoming an NPA and to enable the borrower to repay the loan.

2. Recovery through legal action: Banks can take legal

action against borrowers who have defaulted on their loans. Legal action
can include seizing the collateral, filing a case with the Debt Recovery
Tribunal (DRT), or initiating insolvency proceedings under the
Insolvency and Bankruptcy Code (IBC). Legal action is a time-
consuming process, and recovery is not guaranteed.

3. Sale to asset reconstruction companies: Banks can sell

their NPAs to asset reconstruction companies (ARCs) at a discount.
ARCs specialize in recovering NPAs and have the expertise and
resources to recover such assets. Banks can sell their NPAs to ARCs and
use the proceeds to reduce their NPAs.

4. Write-off: Banks can write off their NPAs when they

determine that the loan is uncollectible. Writing off an NPA means that
the bank removes the loan from its balance sheet and makes provisions
against the loss. Writing off an NPA does not mean that the borrower is
released from their obligation to repay the loan.

In conclusion, NPAs are a major concern for banks and financial

institutions as they have a significant impact on their financial health.
There are different types of NPAs based on the length of time they have
been non-performing and the likelihood of recovery. The RBI has
defined three categories of NPAs, namely substandard assets, doubtful
assets, and loss assets. NPAs can also be classified based on the nature
of security against them, i.e., secured and unsecured NPAs.

Banks and financial institutions use different methods to manage

their NPAs, including restructuring, recovery through legal action, sale
to ARCs, and write-off. However, managing NPAs is not an easy task,
and banks need to take proactive measures to prevent loans from
becoming NPAs. This includes conducting due diligence before granting

[Type text] Page 19

loans, monitoring loan accounts regularly, and taking timely action to
recover loans that have turned non-performing.

In addition, banks can use technology to manage their NPAs

effectively. For example, they can use data analytics to identify early
warning signals of potential NPAs and take preventive measures. They
can also use AI and machine learning algorithms to analyze borrower
behavior patterns and credit risk profiles and make better lending
decisions. Overall, managing NPAs is a critical challenge for banks and
financial institutions, and they need to adopt a comprehensive approach
to tackle this issue. By using a combination of preventive measures,
proactive loan monitoring, and effective recovery strategies, banks can
minimize the impact of NPAs on their financial health and ensure
sustainable growth.

2.3 Reasons of NPA

The problem of Non-Performing Assets (NPAs) has been a major issue for the Indian
banking sector for many years. The Indian banking sector has been grappling with the
problem of NPAs since the 1990s, and the problem has persisted over the years,
impacting the overall health of the banking system. In this article, we will discuss the
reasons for the NPA problem in India and how it has evolved over the years.

Reasons for NPA in India:

1. Economic slowdown and business cycle: Economic slowdowns and business

cycles are one of the main reasons for NPAs in India. When the economy
slows down, businesses and industries face financial difficulties, which results
in them defaulting on loans. This problem is more acute for small and medium
enterprises (SMEs), which face a more significant impact during economic
slowdowns. The Indian economy has witnessed multiple economic slowdowns
over the years, and each time it has resulted in an increase in the number of
NPAs in the banking sector.

2. Inadequate credit appraisal: Inadequate credit appraisal is another reason for

the NPA problem in India. Banks and financial institutions often do not
conduct proper due diligence while sanctioning loans, which results in them
lending to businesses and industries that are not creditworthy. This problem is
more common among public sector banks (PSBs) and regional rural banks
(RRBs), which have a higher exposure to SMEs.

[Type text] Page 20

 3. Delay in project implementation: The delay in project implementation is
another reason for NPAs in India. The delay in implementation of
infrastructure projects such as power, roads, and highways results in cost
overruns and time overruns, which impact the cash flow of the businesses and
industries involved in these projects. This, in turn, leads to a default on loans.

4. Diversion of funds: Diversion of funds is another major reason for NPAs in

India. Many businesses and industries divert the funds borrowed from banks
and financial institutions for purposes other than the intended purpose. This
results in a mismatch between the actual utilization of funds and the projected
utilization of funds, leading to default on loans.

5. Political interference: Political interference is another reason for the NPA

problem in India. The government and politicians often pressurize banks and
financial institutions to lend to certain businesses and industries for political
reasons. This results in banks and financial institutions lending to businesses
and industries that are not creditworthy, leading to default on loans.

6. Willful default: Willful default is another major reason for NPAs in India.
Many businesses and industries deliberately default on loans, knowing that
they can get away with it. This is because the legal system in India is slow and
ineffective, and it takes a long time for banks and financial institutions to
recover their money from defaulters.

7. Lack of credit discipline: Lack of credit discipline among borrowers is another

reason for NPAs in India. Many borrowers do not adhere to the repayment
schedules agreed upon with banks and financial institutions, resulting in
default on loans.

8. External factors: External factors such as natural disasters, geopolitical events,

and pandemics can also result in NPAs. These events can impact the cash flow
of businesses and industries, resulting in a default on loans.

Evolution of NPA problem in India:

The NPA problem in India has evolved over the years, and the severity of the problem
has increased over time. In the 1990s, the NPA problem in India was mainly due to
economic slowdowns and inadequate credit appraisal. The problem persisted in the
2000s, and the government introduced several measures to address the problem,
including the Securitization and Reconstruction of Financial Assets and Enforcement
of Security Interest (SARFAESI) Act, 2002, and the Debt Recovery Tribunals (D RT)
Act, 1993, to facilitate the recovery of bad loans.

However, the NPA problem in India continued to persist, and the severity of the
problem increased in the 2010s. During this period, the Indian banking sector
witnessed several high-profile cases of willful default, including the Kingfisher

[Type text] Page 21

Airlines case and the Nirav Modi case. These cases highlighted the weaknesses in the
Indian legal system and the need for stronger recovery mechanisms.

The Indian government has taken several measures to address the NPA problem in
recent years. These include the Insolvency and Bankruptcy Code (IBC), 2016, which
provides a time-bound and efficient process for the resolution of insolvent companies,
and the establishment of asset reconstruction companies (ARCs) to help banks
recover bad loans. The government has also taken steps to improve the credit culture
in the country and promote financial inclusion.

Despite these measures, the NPA problem in India remains a significant challenge for
the banking sector. According to the RBI, the gross NPA ratio of scheduled
commercial banks in India was 7.5% as of March 2021. The COVID-19 pandemic has
also added to the NPA problem, as businesses and industries face financial difficulties
due to the lockdowns and disruptions caused by the pandemic.

Conclusion:

In conclusion, the NPA problem in India is a complex issue that requires a multi-
pronged approach to address. The problem has evolved over the years, and the
severity of the problem has increased over time. The Indian government and the RBI
have taken several measures to address the problem, including the introduction of new
recovery mechanisms and the improvement of the credit culture in the country.
However, managing the NPA problem in India will require continued efforts and a
sustained focus on improving the health of the banking sector.

2.4 Impact of NPA

The problem of Non-Performing Assets (NPA) in India has been a persistent

issue that has affected the country's banking sector, economy, and society as a whole.
The term NPA refers to loans or advances that have stopped generating income for
banks or financial institutions because of the borrower's failure to repay them. In this
essay, we will examine the impact of the NPA problem in India in greater detail.

 Impact on the banking sector:

The NPA problem has had a significant impact on the health of the banking
sector in India. The problem has led to lower profitability, weaker capital adequacy,
and increased risk for banks. This, in turn, has made banks less able to lend and invest
in the economy. According to the Reserve Bank of India (RBI), the gross NPA ratio
of scheduled commercial banks in India was 7.5% as of March 2021. This is a
significant increase from 2.3% in March 2015, highlighting the severity of the
problem.

[Type text] Page 22

 The NPA problem has also affected the ability of banks to attract deposits. As
the problem has become more widespread, depositors have become increasingly
cautious about placing their funds in banks that are perceived to have higher levels of
NPAs. This has resulted in a shift of deposits from public sector banks (PSBs) to
private sector banks, which are perceived to have lower levels of NPAs.

Furthermore, the NPA problem has led to a decline in the market value of
banks. Banks with higher levels of NPAs are perceived to be riskier investments, and
this has led to a decline in their share prices. This, in turn, has affected the overall
valuation of the banking sector, which is an essential component of the Indian
economy.

 Impact on economic growth:

The NPA problem has had a negative impact on India's economic growth. It
has limited the availability of credit to businesses and individuals, leading to reduced
investment and consumption. This, in turn, has affected the overall economic activity
and contributed to slower growth in the country. SMEs, which are important drivers
of economic growth and job creation in the country, have been particularly affected
by the NPA problem. The lack of access to credit has limited their ability to invest
and expand, which has contributed to slower economic growth.

The NPA problem has also affected the government's ability to invest in
critical sectors such as infrastructure and social welfare. As banks have struggled to
recover bad loans, the government has had to provide capital support to recapitalize
them. This has constrained the government's ability to invest in critical sectors and
has contributed to slower economic growth.

 Impact on financial inclusion:

The NPA problem has hindered the government's efforts to promote financial
inclusion in the country. The problem has led to a lack of access to credit for SMEs,
which are essential drivers of economic growth and job creation. The lack of access to
credit has also affected the ability of low-income households to access finance. This
has limited their ability to invest in education, healthcare, and other essential services.

The government has launched several initiatives to promote financial

inclusion, such as the Pradhan Mantri Jan Dhan Yojana (PMJDY), which aims to
provide access to banking services to all households in the country. However, the
NPA problem has hindered the government's efforts to achieve its financial inclusion
goals, as banks have been reluctant to lend to riskier borrowers.

 Impact on government finances:

[Type text] Page 23

The NPA problem has also impacted the government's finances. As banks have
struggled to recover bad loans, the government has had to provide capital support to
recapitalize them. This has led to a reduction in tax revenue and increased expenditure
on bank recapitalization. The problem has also constrained the government's ability to
invest in critical sectors such as infrastructure

2.5 Regulatory Framework

The Non-Performing Asset (NPA) problem in India has been a persistent issue that
has affected the country's banking sector, economy, and society as a whole. The
Reserve Bank of India (RBI), as the regulator of the banking sector, has taken several
measures to address the NPA problem and ensure the stability of the banking sector.
In this essay, we will examine the regulatory framework on NPA in India in greater
detail.

Regulatory Framework on NPA in India:

1. The Reserve Bank of India (RBI) guidelines:

The RBI has issued several guidelines and circulars to address the NPA problem in
the banking sector. In 2015, the RBI introduced the Asset Quality Review (AQR) to
ensure the early recognition of NPAs and the proper classification of assets. The AQR
required banks to conduct a thorough review of their loan portfolios and classify any
stressed assets as NPAs. This helped to bring greater transparency to the banking
sector and ensure that NPAs were identified and addressed in a timely manner.

The RBI has also introduced several measures to encourage banks to resolve NPAs. In
2016, the RBI introduced the Scheme for Sustainable Structuring of Stressed Assets
(S4A), which provided a framework for the resolution of stressed assets. The S4A
allowed banks to convert a portion of the debt into equity or other instruments, which
helped to reduce the debt burden of the borrower and improve the chances of
recovery.

In 2017, the RBI introduced the Revised Framework for Resolution of Stressed
Assets, which replaced the earlier framework on resolution of stressed assets. The
revised framework provided a time-bound resolution process for stressed assets and
required banks to take proactive steps to resolve NPAs. The framework also
introduced the concept of Insolvency and Bankruptcy Code (IBC) for resolving
NPAs. The IBC provided a legal framework for the resolution of NPAs and ensured
that the resolution process was completed within a time-bound manner.

2. The Insolvency and Bankruptcy Code (IBC):

[Type text] Page 24

The IBC was introduced in 2016 to provide a comprehensive framework for the
resolution of NPAs. The IBC provides for a time-bound resolution process and
ensures that the interests of all stakeholders, including lenders and borrowers, are
protected. The IBC provides for the appointment of an Insolvency Professional (IP) to
manage the resolution process and ensures that the resolution plan is approved by a
committee of creditors.

The IBC has had a significant impact on the resolution of NPAs in India. The IBC has
facilitated the resolution of several large NPAs, such as the resolution of Bhushan
Steel and Electro steel Steels. The IBC has also ensured that the resolution process is
completed within a time-bound manner, which has reduced the time taken to resolve
NPAs.

3. The National Company Law Tribunal (NCLT):

The National Company Law Tribunal (NCLT) was established under the Companies
Act, 2013, to handle matters related to insolvency and bankruptcy. The NCLT has
been given the power to adjudicate on matters related to the insolvency and
bankruptcy of companies, including the resolution of NPAs.

The NCLT has played a significant role in the resolution of NPAs in India. The NCLT
has been instrumental in facilitating the resolution of several large NPAs, such as the
resolution of Essar Steel and Ruchi Soya. The NCLT has also ensured that the
resolution process is completed within a time-bound manner, which has reduced the
time taken to resolve NPAs.

4. The Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest (SARFAESI) Act:

The SARFAESI Act was introduced in 2002 to provide a framework for the
securitization and reconstruction of financial assets and the enforcement of security
interest. The Act allows banks and financial institutions to take possession of the collateral
provided by borrowers in the event of default. The Act also provides for the sale of the
assets to recover the outstanding debt.

The SARFAESI Act has played a significant role in addressing the NPA problem in
India. The Act has empowered banks and financial institutions to take proactive steps
to recover their dues and has reduced the time taken to recover the outstanding debt.
The Act has also provided a legal framework for the recovery of dues, which has
increased the confidence of lenders in the banking sector.

Challenges in the Regulatory Framework on NPA in India:

While the regulatory framework on NPA in India has improved over the years, there
are still several challenges that need to be addressed. Some of the key challenges are:

1. Lack of coordination among regulators:

[Type text] Page 25

There is a lack of coordination among regulators in the banking sector, which has led
to delays in the resolution of NPAs. The RBI, SEBI, and IRDAI regulate different
aspects of the banking sector, and there is a need for greater coordination among these
regulators to ensure a more efficient resolution process.

2. Delay in the resolution process:

Despite the introduction of the IBC and other measures, the resolution process for
NPAs in India is still time-consuming. The resolution process often gets delayed due
to legal challenges and other factors, which increases the burden on the banking
sector.

3. Lack of adequate infrastructure:

The resolution of NPAs requires the involvement of several stakeholders,

including legal professionals, insolvency professionals, and valuers. However, there is
a shortage of these professionals in India, which has led to delays in the resolution
process.

Conclusion:

The regulatory framework on NPA in India has evolved over the years, and
several measures have been introduced to address the NPA problem. The introduction
of the IBC, the SARFAESI Act, and other measures have had a significant impact on
the resolution of NPAs in India. However, there are still several challenges that need
to be addressed, including the lack of coordination among regulators and the delay in
the resolution process. Addressing these challenges will be crucial to ensuring the
stability of the banking sector and the economy as a whole.

2.6 Strategies for NPA Management

Non-Performing Assets (NPAs) are a major challenge for the banking system
worldwide, including India. NPAs represent loans that have become delinquent or
defaulted and have not been serviced by the borrower for a specified period. NPA
management is a critical task for banks and financial institutions to maintain the
stability of the banking system and support economic growth. This article provides an
in-depth analysis of various strategies for NPA management.

1. Early Detection and Prevention:

The first step in NPA management is early detection and prevention. Banks
and financial institutions must have a robust credit appraisal process that evaluates the
creditworthiness of borrowers and identifies potential risks. This process involves a
thorough assessment of the borrower's financial position, cash flow projections,

[Type text] Page 26

repayment capacity, and collateral. By identifying potential NPAs early on, banks can
take proactive steps to prevent them from turning into actual NPAs.

The early detection of NPAs also requires a robust monitoring and reporting
system. Banks and financial institutions must have an efficient system to monitor the
performance of their loan portfolio and report potential risks to the management. The
monitoring and reporting system should be supported by advanced analytics tools that
can identify early warning signals of potential NPAs.

2. Restructuring and Resolution:

Restructuring and resolution are essential strategies for managing NPAs.

Banks and financial institutions can restructure the debt of borrowers who are facing
temporary financial difficulties. This can involve rescheduling the repayment of the
loan or extending the tenure of the loan. The objective of restructuring is to provide
relief to the borrower and enable them to repay the loan.

In cases where the borrower is unable to repay the debt, the bank can initiate
the resolution process. The resolution process involves the recovery of the outstanding
debt by selling the assets pledged as collateral. The recovery process can be initiated
under the Insolvency and Bankruptcy Code (IBC) or the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act.

The IBC provides for the resolution of insolvent companies and individuals.
The Act allows the creditors to initiate the resolution process and appoint an
insolvency professional to manage the affairs of the borrower. The objective of the
IBC is to maximise the value of the assets of the borrower and distribute the proceeds
to the creditors.

The SARFAESI Act allows banks and financial institutions to take possession
of the collateral provided by borrowers in the event of default. The Act also provides
for the sale of the assets to recover the outstanding debt. The SARFAESI Act has
played a significant role in addressing the NPA problem in India. The Act has
empowered banks and financial institutions to take proactive steps to recover their
dues and has reduced the time taken to recover the outstanding debt.

3. Asset Quality Review:

An asset quality review is an essential tool for managing NPAs. It involves a

comprehensive review of the asset portfolio of banks and financial institutions to
identify potential risks and NPAs. By conducting an asset quality review, banks can
take proactive steps to manage NPAs and prevent them from becoming a systemic
risk.

[Type text] Page 27

 The asset quality review should be conducted periodically, and the results
should be reported to the management and the regulators. The review should evaluate
the quality of the loan portfolio, the adequacy of the loan loss provisions, and the risk
management practices of the bank.

4. Collaboration and Partnership:

Collaboration and partnership are essential strategies for managing NPAs.

Banks and financial institutions can collaborate with each other to share best practices
and leverage each other's strengths. This collaboration can include joint loan recovery
efforts, co-lending arrangements, and consortium lending.

Banks can also partner with external agencies such as asset reconstruction
companies (ARCs) to manage their NPAs. ARCs are specialised companies that
acquire the NPAs of banks and financial institutions and recover the outstanding debt
by selling the assets pledged as collateral. By partnering with ARCs, banks can reduce
their NPA portfolio and improve their asset quality.

5. Technology-enabled Solutions:

Technology-enabled solutions are increasingly being used for NPA

management. Banks and financial institutions are leveraging advanced analytics tools
to identify early warning signals of potential NPAs. These tools can evaluate the
creditworthiness of borrowers, analyse their financial performance, and identify
potential risks.

Banks are also using technology-enabled solutions for loan recovery. The use
of digital platforms and mobile applications has made it easier for banks to recover
their dues. These platforms provide a transparent and efficient mechanism for
borrowers to repay their loans and for banks to recover their outstanding debt.

Conclusion:

NPA management is a critical task for banks and financial institutions to

maintain the stability of the banking system and support economic growth. The
strategies discussed above provide a comprehensive framework for NPA
management. Early detection and prevention, restructuring and resolution, asset
quality review, collaboration and partnership, and technology-enabled solutions are
essential strategies for managing NPAs. Banks and financial institutions must adopt a
holistic approach to NPA management and leverage these strategies to maintain the
health of their loan portfolio. By adopting these strategies, banks can minimize their
NPA portfolio, improve their asset quality, and enhance their profitability.

[Type text] Page 28

2.7 Current Trends and Challenges

Non-Performing Assets (NPAs) have been a persistent problem for the banking sector
in India for many years. NPAs refer to loans that are not repaid by borrowers, either
due to default or delayed payments. The problem of NPAs has a significant impact on
the banking sector and the overall economy. In this article, we will discuss the current
trends and challenges of NPA management in India.

Current Trends:

1. Impact of COVID-19:

The COVID-19 pandemic has had a significant impact on the banking sector,
particularly on the management of NPAs. The pandemic has led to a decline in
economic activity, which has affected the repayment capacity of borrowers. As a
result, there has been an increase in the number of NPAs in the banking sector.

The Reserve Bank of India (RBI) has introduced various measures to mitigate the
impact of the pandemic on the banking system. These include loan restructuring,
relaxation in asset classification norms, and liquidity support to banks.

2. Increasing Use of Technology:

Banks and financial institutions are increasingly using technology-enabled solutions

for NPA management. Advanced analytics tools are being used to identify early
warning signals of potential NPAs. These tools can evaluate the creditworthiness of
borrowers, analyse their financial performance, and identify potential risks.

Banks are also using technology-enabled solutions for loan recovery. The use of
digital platforms and mobile applications has made it easier for banks to recover their
dues. These platforms provide a transparent and efficient mechanism for borrowers to
repay their loans and for banks to recover their outstanding debt.

3. Asset Reconstruction Companies (ARCs):

Asset Reconstruction Companies (ARCs) have emerged as a significant player in the

management of NPAs. ARCs acquire the NPAs of banks and financial institutions at a
discounted price and then work towards recovering the outstanding debt by selling the
assets pledged as collateral. By partnering with ARCs, banks can reduce their NPA
portfolio and improve their asset quality.

4. Insolvency and Bankruptcy Code (IBC):

The Insolvency and Bankruptcy Code (IBC) has been a significant development in the
management of NPAs. The IBC provides a time-bound and structured process for the
resolution of NPAs. Under the IBC, NPAs are resolved through a process of
liquidation or restructuring.

[Type text] Page 29

According to report of business standard

The rise in profitability that aided banks to improve their provisions has

resulted in net non-performing assets (NPAs) to net advances ratio falling to 1.3 per
cent in September 2022 – the lowest in 10 years — the Reserve Bank of India’s
(RBI’s) Financial Stability Report said.
Net NPAs were at similar levels back in March 2012. As of end-September,
net NPAs of private banks had fallen to 0.8 per cent, as against 1.8 per cent for public
sector banks (PSBs).

“The quarterly slippage ratio, which had been rising since December 2021, cooled off
during Q2, 2022-23, with considerable improvement recorded by PSBs,” the report
said. The provision coverage ratio, which has been increasing steadily since March
2021, has reached 71.5 per cent in September 2022.

However, the write-offs to gross NPA ratio increased in the first half of 2022-

23 on an annualised basis, after declining for two consecutive years.
Gross NPAs also continued their downward journey to reach 5 per cent at the end of
September — a seven-year low — and is expected to trend down further to 4.9 per
cent by September 2023. This was achieved on the back of decrease in slippages,
increase in write-offs, and pick up in credit growth.

“Reduction in slippages, or fresh accretions to NPAs, was a major contributor to the

reduction in overall NPAs,” the report said.

“The declining tendency in the GNPA ratio is likely to continue — under the baseline
scenario of the stress testing framework, it is projected to fall further to 4.9 per cent in
September 2023,” it said.

The resilience of the banking system is also evident from the stress tests conducted by
the RBI, which showed that banks are fully capable of absorbing macroeconomic
shocks, even without any infusion of capital by stakeholders.

Under the baseline scenario, the aggregate capital adequacy ratio (CAR) of 46 major
banks is projected to slip from 15.8 per cent in September 2022 to 14.9 per cent by
September 2023.

Further, CAR may go down to 14 per cent in the medium stress scenario and to 13.1
per cent under the severe stress scenario by September 2023, but it will still be above
the minimum capital requirement, including capital conservation buffer (CCB)
requirements of 11.5 per cent.

[Type text] Page 30

“None of the 46 SCBs (scheduled commercial banks) would breach the regulatory
minimum capital requirement of 9 per cent in the next one year, even in a severely
stressed situation, although nine SCBs may fall short of the minimum capital
inclusive of CCB,” the report said.

According to the report, under the baseline stress scenario, the common equity tier-1
(CET1) capital ratio of select banks will fall by 70 basis points to 12.1 per cent by
September 2023 from 12.8 per cent in September 2022. Similarly, in a severely
stressed macroeconomic environment, the aggregate CET1 capital ratio would deplete
only by 210 basis points, which would not breach the minimum regulatory norms.

“…all banks would be able to meet the minimum regulatory CET1 ratio plus CCB of
8 per cent over the next one year under all the three scenarios,” the RBI said.

Stress tests under baseline scenario suggest that gross NPAs of banks are expected to
fall to 4.9 per cent by September 2023 from the current 5 per cent as of September
2022. However, if the macroeconomic environment worsens to a medium or severe
stress scenario, gross NPAs may rise to 5.8 per cent and 7.8 per cent, respectively.

This is without taking the potential impact of stressed asset purchases by National
Asset Reconstruction Company Limited (NARCL) into account and under the
assumption that there will be no reliefs from the central bank.

At the bank group level, gross NPA ratios of PSBs may swell from 6.5 per cent in
September 2022 to 9.4 per cent in September 2023, whereas it will go up from 3.3 per
cent to 5.8 per cent for private banks, and from 2.5 per cent to 4.1 per cent for foreign
banks, under the severe stress scenario, the RBI said.

Challenges:

1. Lack of Credit Discipline:

One of the significant challenges in NPA management is the lack of credit discipline
among borrowers. Many borrowers take loans without proper analysis of their
repayment capacity, leading to defaults and delayed payments.

2. Ineffective Loan Recovery Mechanisms:

The loan recovery mechanisms in India are often slow and ineffective. The legal
system is also overburdened, leading to delays in the resolution of NPAs. As a result,
the recovery of outstanding debt is a significant challenge for banks and financial
institutions.

3. Asset Quality Review (AQR):

[Type text] Page 31

The Asset Quality Review (AQR) introduced by the RBI in 2015 has highlighted the
problem of NPAs in the banking sector. AQR is a process of reviewing the asset
quality of banks to identify potential NPAs. However, AQR has also resulted in a
significant increase in the NPAs of banks.

4. Lack of Skilled Manpower:

Another challenge in NPA management is the lack of skilled manpower in banks and
financial institutions. The identification and resolution of NPAs require specialised
skills and knowledge. However, many banks and financial institutions do not have the
necessary resources to manage their NPA portfolio effectively.

5. Lack of Transparency:

There is often a lack of transparency in the management of NPAs. Banks and

financial institutions do not disclose information about their NPA portfolio, which
makes it difficult for investors and stakeholders to make informed decisions.

6. Political Interference:

There is often political interference in the resolution of NPAs, which affects the
effectiveness of NPA management. Political interference can lead to delays in the resolution
of NPAs and can affect the decision-making process of banks and financial institutions.

7. External Factors:

External factors such as economic conditions, industry cycles, and global events can
have a significant impact on NPA management. For example, a slowdown in the
economy can lead to an increase in the number of NPAs, while a change in industry
dynamics can affect the creditworthiness of borrowers.

Conclusion:

NPA management continues to be a significant challenge for the banking sector in

India. The COVID-19 pandemic has further aggravated the problem, leading to an
increase in the number of NPAs. However, the increasing use of technology, the
emergence of ARCs, and the implementation of the IBC are positive developments in
NPA management.

To address the challenges in NPA management, banks and financial institutions need
to focus on credit discipline, effective loan recovery mechanisms, and the
development of skilled manpower. The RBI also needs to ensure transparency in NPA
management and address political interference in the resolution of NPAs.

Overall, effective NPA management is critical for the health of the banking sector and
the overall economy. It is essential for banks and financial institutions to take a

[Type text] Page 32

proactive approach towards NPA management to ensure the sustainable growth of the
sector.

[Type text] Page 33

 Chapter – III

PROFILE OF THE STUDY

3.1 Introduction

3.2 Capital market in India: a brief overview

3.3 Background

3.4 Classification of market

3.5 The regulatory framework and legislation: a discussion
3.6 Acts governing the capital markets
3.7 Conclusion

[Type text] Page 34