Non Performing Assets Essay Example

as it generates a significant portion of the banks' income.

Banks provide loans, overdrafts, cash credit, and bill discounting as a means of lending money. They also offer agency services acting as an agent for their customers. These services include collecting cheque, bank draft, bills, interest, dividends, and purchasing securities on behalf of customers. Additionally, banks arrange for the transfer of funds between different locations and act as trustees, executors, and representatives for their customers.

ii. General Utility Services: Banks provide general utility services to both their customers and the general public. These services include accepting valuable articles and documents for safekeeping, assisting exporters and importers in foreign trade, issuing travelers checks, letters of credit, and circular notes, as well as acting as a reference and providing information about the financial standing of customers to others.

The Central Bank has multiple activities, including: A. Holding a monopoly on issuing currency notes. B. Functioning as a banker, agent, and advisor to the government.

Banks have multiple functions in the modern economy, including acting as custodians of cash reserves for other banks and serving as lenders of last resort.

Banks play a crucial role in driving economic development through various functions. These functions encompass mobilizing small and dispersed savings, making them accessible for productive purposes, and fostering the process of capital formation.

Banks offer safety and security for the savings of individuals and provide a convenient and cost-effective payment method through the introduction of the cheque system.

The use of cheques streamlines and saves time in handling business obligations. Moreover, banks provide a convenient and affordable means of transferring funds between locations. Bank drafts are commonly employed for remitting funds from one location to

another.

Banks play a crucial role in transferring capital from less productive areas to more productive ones, thus improving the efficiency and effectiveness of funds. They also promote economic growth in underdeveloped regions by relocating funds. Additionally, banks have the power to impact interest rates in money markets by controlling the money supply.

Bank money or bank deposits, known as financial assets, greatly impact interest rates in the money market. Moreover, banks play a vital role in facilitating the financial needs of trade, commerce, industry, and agriculture. Without their support, growth in these sectors would significantly diminish. Additionally, banks actively allocate funds to various production channels.

When providing loans, discrimination is made based on the type of activities being funded. Preference is given to essential activities while non-essential activities are disfavored. Certain conditions exist where interest or principal repayments remain outstanding for more than 180 days. In the case of term loans, if the installment of principal or interest becomes overdue by more than 180 days, it will be considered delinquent. Similarly, if overdraft or cash credit accounts remain 'out of order' for a period exceeding 180 days, they will be deemed delinquent. Likewise, bills purchased and discounted will be considered delinquent if they remain overdue for more than 180 days. Agricultural advances become delinquent when interest or principal payments exceed two harvest seasons but do not surpass two and a half years. Finally, any amount that remains overdue for more than 180 days in other accounts will be considered delinquent.

'90 days overdue norm' is being adopted to identify non-performing assets (NPAs) from the fiscal year ending March 31, 2004. This move aims to align with international best

practices and ensure transparency. Starting from March 31, 2004, an NPA will be classified as a loan or advance that meets any of the following criteria: (i) interest and/or principal installment is overdue for more than 90 days for a Term Loan, (ii) the account remains 'out of order' for more than 90 days for an overdraft/cash credit (OD/CC), (iii) bills purchased and discounted remain overdue for more than 90 days, or (iv).

The overdue status of interest and principal payments for agricultural purposes is determined by two harvest seasons or a period not exceeding two and a half years. Any amount unpaid for more than 90 days for other accounts is also considered overdue. To facilitate the transition to the 90-day standard, banks must start charging interest monthly by April 1, 2002. However, this change in interest charging method should not impact the classification of an advance as a non-performing asset (NPA). Banks are still required to classify an account as an NPA if the interest charged remains unpaid within 180 days from the end of that quarter starting on April 1, 2002 or within 90 days from the end of that quarter starting on March 31, 2004. Furthermore, if the outstanding balance continuously exceeds the sanctioned limit or drawing power, an account will be classified as "Out of Order."

If the outstanding balance in the primary operating account is less than the sanctioned limit or drawing power, and there have been no credits for 180 days (to be reduced to 90 days from March 31, 2004) as of the Balance Sheet date, or the credits are insufficient to cover the interest debited during the same

period, these accounts should be considered 'out of order'. Consequently, banks should not charge interest on any Non-Performing Assets (NPA) and should not include it in their income account. However, interest on loans secured by term deposits, NSCs, VIPs, KVPs, and Life policies may be included in the income account on the due date, provided there is enough margin in the accounts. Fees and commissions earned by banks resulting from re-negotiations or rescheduling of outstanding debts should be recognized on an accrual basis over the duration of the renegotiated or rescheduled extension of credit.

The interest on Government guaranteed advances should not be included in income account if the advances become Non-Performing Assets (NPA) unless the interest has been realized. If any advance, including bills purchased and discounted, becomes NPA at the end of a fiscal year, the interest that was previously accrued and credited to income account should be reversed or provided for if it has not been realized. This rule applies to Government guaranteed accounts as well. For NPAs, any fees, commission, or similar income that has been accrued should no longer be recognized in the current period and should be reversed or provided for in previous periods if not collected. Once an account becomes NPA, income recognition cannot take place.

The interest accrued on non-performing loan accounts is debited to the specific account and credited to the interest suspense account instead of the profit and loss account. Typically, no debits are allowed in non-performing assets except for unavoidable expenditures such as litigation expenses and insurance. Therefore, the outstanding balance in an NPA account consists of two components: 1. The balance as of the

date it became an NPA, and 2. The accrued but unrealized interest.

Banks calculate provisions for loan losses on the balance sheet date. These provisions are based on the net balance, which is the balance after deducting the amount kept in the interest suspense account. The book balance of the net of the interest suspense account is referred to as Gross NPA. However, if a guarantee claim is received from credit guarantee corporations like ECGC before making provisions for loan losses, it is subtracted from the gross NPA. The term "net NPA" represents the balance in the interest suspense account. When evaluating, RBI and other rating agencies typically rely on the net NPA balance.

Both Gross Non-Performing Assets (NPA) and Net NPA play a crucial role in the financial sector. Gross NPA is determined by subtracting the balance in the interest suspense account from the outstanding balance. On the other hand, Net NPA is calculated by deducting the claimed received amount and provision outstanding from Gross NPA.

The impact of NPAs cannot be underestimated as it has far-reaching consequences. At a macro level, NPAs hinder credit supply from potential lenders, which in turn negatively affects capital formation and economic activity within the country. At a micro level, high levels of NPAs have severely impacted banks and financial institutions (FIs). This is evident through reduced profits due to increased provisions and diminished interest income. Furthermore, these unsustainable levels have led to limitations on fund recycling, resulting in asset-liability mismatches.

The problem of non-performing assets (NPA) has had a detrimental effect on banks' capital base and competitiveness, impacting both the banking sector and the economy as a whole. NPAs have been

a significant issue for Indian banks for more than ten years, signaling potential survival challenges for affected banks in the future. However, the Indian government and RBI have taken steps to tackle this problem by implementing reforms that include suggestions from the two Narasimhan Committee Reports.

Despite implementing various corrective measures to address and resolve this issue, concrete results have not yet been achieved. This virus is widespread and affects banking and financial institutions worldwide. However, nationalized banks, followed by the SBI group and all India Financial Institutions, bear the brunt of the problem. As of 31.03,

In 2004, the total gross NPA of all scheduled commercial banks was Rs. 63883 crore. Table No. 1 provides the net NPA figures for the past three years. Furthermore, the ratio of net non-performing assets to net advances also decreased in 2005-06.

The majority of banks have a ratio of less than 4 percent. Punjab and Sind Bank has the highest ratio at 9.62 percent, followed by Dena Bank of India at 9.4 percent. Four banks reported a "nil" ratio during 2005-2006. Additionally, it is discovered that commercial banks, in general, tend to underestimate their NPA figures.

According to a report in a national daily, the banking industry has underestimated its non-performing assets (NPAs) by a staggering amount of Rs. 3862.10 Crore as of March 1997. It is also believed that the industry has not made sufficient provisions, amounting to Rs.

The public sector banking industry is the worst offender, with nineteen nationalized banks underestimating their NPAs by Rs. 1,412.29 Crore.

The NPA statistics deception entails a total of 3,029.29 Crore. This deceit is accomplished through diverse means, including failure to

adhere to the designated guidelines for identifying an NPA. Moreover, assets categorized as 'standard' sometimes turn out to be actually 'sub-standard'.

There are various ways in which a Non-Performing Asset (NPA) can be incorrectly categorized. This includes the incorrect classification of a 'loss' asset as either 'doubtful' or 'sub-standard', or misclassifying a 'doubtful' asset as a 'sub-standard' one. Another error is classifying an account of a credit customer as 'sub-standard', while considering other accounts of the same customer as 'standard'. This violates prudential norms. As a result, the amounts set aside for making provisions for NPAs cannot be deducted from taxes. Therefore, banks must either strictly follow the provision guidelines or write off such advances and seek relevant tax benefits by consulting their auditors/tax consultants.

According to regulations, tax provisions should be made for recoveries in these accounts. Banks at the head office level can write-off outstanding advances recorded in branch books. However, it is crucial to make provisions according to account classification. For example, if an advance is classified as a loss asset, a 100 percent provision must be made.

Any individual who is dissatisfied with any action taken by a secured creditor or their authorized officer has the right to appeal to the Debts Recovery Tribunal. This appeal must be submitted within 45 days from the date that the measure in question was implemented, which includes taking possession of an asset, assuming control of the borrower's business management, or appointing a person to manage a secured asset on behalf of the creditor.

If a borrower chooses to initiate an appeal, it will only be considered if they make a deposit amounting to 75% of the sum specified

in the notice issued by the secured creditor. Nevertheless, the Debts Recovery Tribunal holds authority to waive or reduce this required deposit amount if deemed necessary.

The appeal does not require a deposit at the time of filing, but it will not be heard until the deposit is made. The borrower must also submit an application to the Debt Recovery Tribunal when filing the appeal, requesting that the appeal be accepted without any deposit. If the DRT orders a partial deposit, and it is not paid, the appeal may be dismissed. The 75% deposit only applies if the borrower is filing the appeal. If someone else, such as another aggrieved person, files the appeal, it is not required.

If the deposit is not required, the guarantor or shareholder files it. If a person disagrees with the DRT order, they can appeal to the Appellate Tribunal within 30 days of receiving the order. If the DRT or Appellate Tribunal determines that the secured creditor wrongfully possessed assets and orders their return to the borrower, the borrower is entitled to compensation and costs decided by the DRT or Appellate Tribunal. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 allows banks to issue payment notices to defaulters, who must clear their dues within 60 days. Once notified by the bank or financial institution, the mentioned secured assets cannot be sold or transferred without lender consent. The notice informs the borrower that they must pay their dues or face repossession of assets by the bank or financial institution.

In addition to acquiring assets, banks also have the power to take over the management of companies under

the aforementioned Act. This means that bankers will have the necessary authority to either sell the companies that have defaulted or take control of their management. The nationalization of major commercial banks in 1969 and 1980 resulted in significant changes in India's banking system, including a major shift in priorities for banking operations.

Banks adjusted their branch expansion policies to cater to the banking needs of the population in rural and semi-urban areas. To promote socio-economic and rural development, numerous government-sponsored programs were initiated. However, lending in the priority sector, irrational lending influenced by socio-political pressures, increasing levels of bad debts, and expansion of branches in non-profitable zones began to impact the overall financial well-being of the banking sector in the nation.