<Non-Performing

Assets in Banking
Industry
BUSINESS ETHICS

Akansha Sharma
1421435 | F2

Non-Performing Assets in Banking Industry

1. What is the problem? Why is it a problem?
A Non-performing asset (NPA) is well-defined as a credit facility in respect of
which the interest and/or installment of principal has remained past due for
an indicated period of time. In simple terms, an asset is tagged as nonperforming when it ceases to generate income for the lender. A classification
used by RBI that refer to loans that are in jeopardy of default. Once the borrower has failed to
make interest or principal payment for 90 days the loan is considered to be a non-performing
asset.
Non performing assets is a problem for the banks because

It reduces earning capability of the assets and as a result of this return

on assets get affected.

Blocks capital: NPAs carry risk weight of 100% (to the extent it is
uncovered). Therefore they block capital for maintaining Capital
adequacy. As NPAs do not earn any income, they are badly affecting
Capital Adequacy Ratio of the bank.

While calculating Economic Value Added (EVA =Net operating Profit

after tax minus cost of capital) for measuring performance towards
shareholders value creation, cumulative loan loss provisions on NPAs s
considered as capital. Hence, it increases cost of capital and reduces
EVA.

Low yield on advances: Due to NPAs, yield on advances shows a lower

figure than actual yield on standard Advances. The reasons that yield
are calculated on weekly average total advances including NPAs

This will lead to a crisis of confidence in the market. The price of loans,
i.e. the interest rates will shoot up badly. Shooting of interest rates will
directly impact the investors who wish to take loans for setting up
infrastructural, industrial projects etc.
Akansha Sharma
1421435 | F2

2. What should have been done, to avoid the problem? Why

was it not done?
The plan for solving the problem of NPA focuses upon, revamping the
corporate debt restructuring (CDR) mechanism, creating a special resolution
mechanism for the infrastructure sector, setting up of a national asset
management company, liberalizing norms to increase capitalization of asset
reconstruction companies, and improving the effectiveness of the insolvency
regime and implementation of legal framework. But because of political and
legal issues, the reforms were not made effectively. Both the RBI and
commercial banks are taking crucial steps to solve the NPA problem but the
intensity of problem is too high so it will take more time to solve this problem
from the root.

3. What are the short term difficulties and long term benefits
of following ethical practices or best practices?
Businesses small and large must act ethically to protect themselves and their
business environments. Otherwise, they pose a threat to their employees,
customers and communities. A lack of business ethics endangers the future
of your company, jeopardizes the public good and can have many other
negative effects on a business environment.
Some businesses unethically pursue temporary profits without considering
the long-term impact of their actions on the physical environment. For
example, if timber companies fail to plant trees to replace the ones they
harvest, sooner or later the industry will destroy itself, as well as the world.
Ethical businesses, on the other hand, recognize that sustainable practices
maximize their future prospects and have the added benefit of minimizing
environmental damage.

Akansha Sharma
1421435 | F2

Not following ethical practices in the business can create some problems for
the company in the short run but it will create a goodwill of the company in
the long run, formation of sufficient community development, sustainable
behavior of profits, eliminate risk of recklessness. If unethical business
practices are prevalent, everyone in a business environment is at risk. For
example, if financially reckless companies fail to follow ethical accounting
guidelines, shareholders cant make informed decisions. Consequently, some
investors might lose everything if a companys true financial position is
shakier than revealed. Similar risks exist even on the level of small
businesses. If a local company lies about its finances, its employees cant
make informed decisions about their futures with the unstable company.

4. How does society ensure such problems do not recur,

without affecting tax revenues and employment?
The family is the primary social institution from which all other institutions
are developed. The society is a bigger forum where the child learn the social
patterns, mannerism, multi-dimensional individual and community value. The
family carries its rituals, traditions. The society caresses, transmits and
preserve the age old racial culture, civilization and norms through its
members. The school owns special responsibility to enable the future
generation to up held the prized values which satisfied human desires.
In school, children are members of a small society that exerts a tremendous
influence on their moral development. Teachers serve as role model to
students in school; they play a major role in inculcating their ethical
behavior. Peers at school diffuse boldness about cheating, lying, stealing,
and consideration for others. Though there are rules and regulations, the
educational institutions infuse the value education to the children in an
informal way. They play a major role in developing ethical behavior in
children.
General Steps are: Accountability Role model & Helping and Appreciation
Akansha Sharma
1421435 | F2

5. Your views and recommendations, based on your study of

similar situations elsewhere
Companies with a strong ethical identity tend to preserve a higher degree of
stakeholder satisfaction, positively prompting the financial results of the
company, according to the Ethical Investment Research Service. Conversely,
lack of personal and professional ethics can lead to negative financial results,
as recently evidenced by the collapse of Wall Street firms. Risky loans and
questionable business practices put many banking and insurance firms in a
hazardous position. Ensuring ethical behavior at a company can help
improve the company's economic performance as people become more
aware of companies' impact on the environment, they want to do business
with companies that reflect their values.
For example, if your production processes causes water pollution, you may
be able to conduct business in a cost-effective manner for the short term,
but public opinion and pressure to improve your impact on the environment
may actually reduce your sales profit in the long run. Avoid these situations
by acting responsibly in the first place.

Akansha Sharma
1421435 | F2