BANKING SECTOR REFORMS AND NPA: A STUDY OF INDIAN COMMERCIAL BANKS

Abstract
m in India concentrating on the various dimensions involved. Against this backdrop, the paper isThe issue of non-performing assets (NPA), the root cause of the recent global financial crisis, has been drawing the attention of the policy makers and academicians alike. The problem of NPAs, which was ignored till recently, has been given considerable attention after liberalization of the financial sector in India. This research paper examines the trends of NPAs in India from various dimensions and explains how mere recognition of the problem and self-monitoring has been able to reduce it to a great extent. It also shows that public sector banks in India, which function to some extent with welfare motives, have as good a record in reducing NPAs as their counterparts in the private sector. The paper also discusses the role of joint liability groups (JLGs) or self help groups (SHGs) in enhancing the loan recovery rate.

Introduction
It has been argued by a number of economists that a well-developed financial system enables smooth flow of savings and investments and hence, supports economic growth. A healthy financial system can help achieve efficient allocation of resources across time and space by reducing inefficiencies arising out of market frictions and other socio-economic factors. Amongst the various desirable characteristics of a well-functioning financial system, the maintenance of a few non-performing assets (NPA) is an important one. NPAs beyond a certain level are indeed cause for concern for everyone involved because credit is essential for economic growth and NPAs affect the smooth flow of credit. Banks raise resources not just on fresh deposits, but also by reuse the funds received from the borrowers. Thus, when a loan becomes non-performing, it affects reuse of credit and credit creation. Apart, NPAs affect profitability as well, since higher NPAs require higher provisioning, which means a large part of the profits needs to be kept aside as provision against bad loans. Therefore, the problem of NPAs is not the concern of the lenders alone but is, indeed, a concern for policy makers as well

who are involved in putting economic growth on the fast track. In India due to the social banking motto, the problem of bad loans did not receive priority from policy makers initially. However, with the reform of the financial sector and the adoption of international banking practices the issue of NPAs received due focus. Thus, in India, the concept of NPA came into the calculation after reforms in the financial sector were introduced on the recommendations of the Report of the Committee on the Financial System (Narasimham, 1991) and an appropriate accounting system was put in place. NPA is defined as an advance where payment of interest or repayment of installment of principal or both remains unpaid for a certain period. In India, According to the Narasimham Committee Report(1991), those assets (advances, bills discounted, overdrafts, cash credit etc.) for which the interest remains due for a period of four quarters i.e 180 days should be considered as NPAs. Subsequently, this period was reduced, and from March 1995 onwards the assets for which the interest has remained unpaid for 90 days were considered as NPAs This paper attempts to provide an overview of the NPA proble arranged as follows. The next section compares India wit h few other countries across the globe. Reform measures and the consequent changes in NPA norms are discussed in Section 3. The next two sections look at the loan recovery mechanisms that are in place, including the legal reforms and the recovery trends. T rends in NPAs both at the bank level and at the sector level are analysed in the penultimate section. The paper ends with a concluding section.

BANK WISE AND BANK GROUP-WISE GROSS NON-PERFORMING ASSETS, GROSS ADVANCES AND GROSS NPA RATIO OF SCHEDULED COMMERCIAL BANKS - 2012 Banks Gross NPAs Gross Advances Gross NPAs to Gross Advances Ratio (%) Public Banks Private Banks Foreign Banks 629217 23470955 2.68 Sector 1831455 88044527 2.08 Sector 11248897 355038902 3.17

Source: Department of Banking Supervision, RBI http://www.isec.ac.in/WP%20252%20-%20Meenakshi%20Rajeev%20and%20H%20P%20Mahesh.pdf http://stock-report.blogspot.in/2012/06/indian-banking-industry.html