Banks areplaying a vital role in the Indian economy. The main function of the banks isto mobilize deposits from public and lend to the needy. Thus the banks aretrusted and they are trustees of public money. The apathy of BigBusinessmen is leading banks into losses.
Bad loans are said to be theNon-performing assets, when the Principal and interest amount are overdue formore than 90 days. The failure of the borrower to honor his commitments on duedate is due to number of reasons, beyond his control in some cases. However,lackadaisical conduct of the banks either under pressure from influentialsections of society or mollified motive or greed of earning usurious interestdo contribute significantly for the generation and growth of Non-performingassets.
The present articleseeks to highlight the effects of the Non-performing assets on banks andits deploring effect on society and the customers in general. INTRODUCTION:Banks are the nervous systemof the Indian economy. Banks the main source of income is the differencebetween the interest they earn on loans given by them and interest they pay ondeposits. Assets for any bank are loans it has lent andinvestments made by the bank. Bad debts or nonperforming assets defines thefinancial condition of the banks.
In general, non-performing asset indicatesthe amount of loan that was not returned by the borrower. An asset becomes anonperforming asset when it ceases to generate income.According, an analysispresent NPA rate of Indian economy is 9.9%, India has been ranked 5thon the list of countries with highest non-performing assets. YEAR NPA Rupees (crores) NPA RATIO March-2016 5,71,841 7.69 June-2016 6,18,09 8.42 September-2016 6,51,792 8.81 December-2016 6,77,443 9.
18 March-2017 7,11,312 9.06 June-2017 8,29,338 10.21 As per RBI analysisfollowing are the non-performing assets ratio in India.LOAN: A thing that isborrowed, especially or the sum of money that is expected to pay back withinterest. There are different types of loans likeØ HOME LOAN: Bank provides a loan to the peoplewho wish to buy their own house.Ø PERSONAL LOAN: The Personal loan is given tobuy some expensive gadgets.
This money can be used for any purpose. Ø VEHICLE LOAN: These loans are given to fulfillyour dream of having one car or bike. A Lender will have the possession of thevehicle till the last installment is made.Ø Business loan: These loans are generallygranted to the existing businessmen, to expand their business.
Getting loansfor startups is very much difficult.Ø GOLD LOANS: This is the safest loan among allthe loans. With the trend in the gold rates, interest rates also vary. The Lender has the right to sell the gold in an auction at thetime of default made by the borrower.
Ø LOANS AGAINST INSURANCE POLICY: This loan isgiven by insurance company itself against the policy issued by it. Otherwise,one can get sanctioned by the bank also. Only 80%of surrender value is given asa loan.Ø AGRICULTURE/CROP LOANS: Agriculture loanenables farmers to get finance for various agriculture operations. The Rate ofinterest on these land is slightly low, compare to other loans in the market.Ø EDUCATION LOAN: These loans are provided withan intention of providing education to every individual. Usually, interest onthis loans is very low.
Definition: A non-performing asset (NPA) is a loan oradvance for which the principal or interest payment remained overdue for aperiod of 90 days.According to RBI “An asset, including a leased asset, becomes non-performing when itceases to generate income for the bank. A ‘non-performing asset’ (NPA) wasdefined as a credit facility in respect of which the interest and/ orinstallment of principal has remained ‘past due’ for a specified period oftime.
The specified period was reduced in a phased manner as under: YEAR TIME PERIOD 1993 FOUR QUARTERS 1994 THREE QUARTERS 1995 TWO QUARTERS From 2004 90 days Assets of the banks areclassified into different types, they arev STANDARD ASSET: TheStandard asset is one which does not disclose any problem and which does notcarry more than normal business risk.v SUBSTANDARD ASSET: Asubstandard asset can be defined as an asset which remained a non-performingasset for less than or equal to 12 months.v DOUBTFULASSET: Ana asset is to beconsidered as a Doubtful asset if it remains a substandard asset for more than12 months.v LOSS ASSET: When an asset remains aNonperforming asset for more than 36 months then it is said to be a loss asset. TYPES OF NON-PERFORMING ASSETS:v GROSS NPA: Gross non-performing assets consistsof all standard assets.
Substandard assets, doubtful assets, and loss assets.They are the loan assets classified as a non-performing asset as per guidelinesof RBI. The gross NPA can be calculated using the below formula. v NET NPA: Net NPA can be defined as thedifference between a Gross non-performing asset and the provision made to writeoff non-performing assets. REASONS THE GROWING NONPERFORMING ASSET:There two types ofreasons which are increasing non-performing asset. They are 1. INTERNALFACTORS2. EXTERNALFACTORSFollowing are theINTERNAL FACTORS which causes growth of NPA’sØ Business failure: A situation in which a company or other business isunable to generate sufficient revenue to cover its expenses.
If thebusiness is unable to generate income, then it may not be able to pay the loanamount it has lent and hence after some time it is to be considered as anon-performing asset.Ø Funds borrowed for a particular purpose but notused for the said purpose.Forsuppose, Anita has taken a loan to start a business, but instead of doingbusiness, she constructs a house with the loan amount.Thensuch type of loans may become irrecoverable and if it is not recovered within90days then it is to be treated as a non-performing asset.Ø Project not completed on time Ø Willful defaults: Willful default is a conscious abstention by an obligorfrom doing that which reasonably and under the terms of the obligation heshould have done. The words “willful default” imply more thannegligence or carelessness.
The word willful means intentional andthe word default means transgression.Ø Management disputes, fraudsØ Inappropriate technology: Due to improper technology and managementinformation system, market-driven decisions on real-time cannot be taken.Proper MIS and financial accounting system are not implemented in the banks,which leads to poor credit collection.Ø Improper SWOT analysis: SWOT analysis refers to the strength,weakness, opportunity, threat. Before lending a loan banker should consider allthese and then lend the loan.Ø Managerial deficiencies: The banker shouldfollow the principle of diversification of risk based on the famous maxim “donot keep all the eggs in one basket”, which means that the banker should notgrant advances to a few big farms only or to concentrate them in few industriesor in a few cities.
For example, let us takethe example of IDBI bank, it has given Vijay Malaya a loan of 900 croresØ Poor credit appraisal system: Deprived credit appraisal is an additionalfactor for the increase in NPAs, due to poor credit appraisal the bank givesadvances to those who are not able to repay it back. They should use bettercredit appraisal to reduce the NPAs.Ø Defective lending process: capacity to pay depends upon, Tangible assets,Success in business. Willingness to pay depends on, Character, Honest,Reputation of the borrower. The banker, therefore, takes utmost care in ensuring that the enterprise or businessfor which a loan is sought is a sound one and the borrower is competent ofcarrying it out successfully, he should be a person of integrity and goodcharacter.These are the internalfactors which are causing the non-performing assets.
The EXTERNAL factorswhich are increasing non-performing assets are as follows:Ø INEFFECTIVE RECOVERY TRIBUNAL: Tribunal refersto a committee or board appointed to make decisions in a particular matter.There are set of the number of recovery tribunals appointed by the governmentto recover the loans and advances. Because of negligence and ineffectiveness intheir work, the bank suffers the consequences of bad loans.Ø GOVERNMENT POLICIES: Banking sector gets newprinciples and policies for its operations with every new government.Ø WILLFUL DEFAULTS: The word willful defaults refer morenegligence or carelessness. The following are somewillful defaulters BANK BORROWER DIRECTOR OUTSTANDING AMOUNT(CRORES) STATE BANK OF INDIA KINGFISHER AIRLINES VIJAY MALLYA 120139.99 AXIS BANK DECCAN CHRONICLE HOLDING LTD VENKATRAMAN REDDY,T.
VINAYAK,RAV RUDY,P.K.IYER 40934.00 BANK OF BARODA SUBHIKSHA TRADING SERVICES LTD R.SUBRAMANIAN 7499 Ø NATURAL CALAMITIES: A major adverse eventresulting from the natural process of the earth are called natural calamities.Because of irregularities of rainfall, the farmers are not able to attain theproduction level. Thus they are not repaying the loans which are ultimatelyresulting from as NPA’s to the banks.
Ø INDUSTRIAL RECESSION: The industries which donot have appropriate project handling, effective management, adequateresources, and advanced technology such type of loan will end up with a lowrecovery. IMPACT OF GROWING NON PERFORMING ASSETS:v Banks will suffer low-profit margins.v The shareholders of the bank will lose a lot ofMoney as banks themselves find difficult to survive in the market.v The rate of interest will go up badly whichwill directly impact the customers.v The funds are getting redirected from godprojects to the bad onesv Because of increasing non-performing assets inbanking sector, it causes less money available to fund other project’sv Liquidity problems may arise when bank do notget their loan amount back.v Banks will charge the higher rate of intereston loans to maintain the profit margin.HOW TO OVERCOME GROWINGNON PERFORMING ASSETS:Ø SECURITIZATION AND RECONSTRUCTION OF FINANCIALASSET AND ENFORCEMENT OF SECURITY ACT: According to this Act, if the borrowerfails to pay his dues, then the banker can have the possession of the assets ofdefaulting borrowers without giving any notice.Ø LOK ADALAT: They can recover the non-performingassets which are up to 5lakhs.
Ø Debt recovery tribunal: These are the group ofpeople appointed by the government to recover the loans.FirstDRT was set up in Ahmedabad in 1994. DRT in Hyderabad in1999.Ø BANKERS SHOULD BE CAUTIOUS: Banks should be aware before lending loans. FINDINGS:NPA ratio is increasingday by day and present NPA rate in INDIA is 9.9%Common people are theone who is getting affected by increasing non-performing assets.INDIA has been ranked 5thon the list of the counties with highest non preforming assets.