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in banking industry .A review of the relevant literature has been described as under:Non Performing Assets engender negative impact on banking stability and growth. Issue of
NPA and its impact on erosion of profit and quality of asset was not seriously considered in
Indian banking prior to 1991. There are many reasons cited for the alarming level of NPA in
Indian banking sector. Asset quality was not prime concern in Indian banking sector till 1991,
but was mainly focused on performance objectives such as opening wide networks/branches,
development of rural areas, priority sector lending, higher employment generation, etc. The
accounting treatment also failed to project the problem of NPA, as interest on loan accounts
were accounted on accrual basis (Siraj K.K. and P. Sudarsanan Pillai, 2012).
A Committee on Banking Sector Reforms known as Narasimham Committee was set up by
RBI to study the problems faced by Indian banking sector and to suggest measures revitalize
the sector. The committee identified NPA as a major threat and recommended prudential
measures for income recognition, asset classification and provisioning requirements. These
measures embarked on transformation of the Indian banking sector into a viable, competitive
and vibrant sector. The committee recommended measures to improve operational
flexibility and functional autonomy so as to enhance efficiency, productivity and
profitability (Chaudhary, S., & Singh, S., 2012).
The main cause of mounting NPAs in public sector banks is malfunctioning of the banks.
Narasimham Committee identified the NPAs as one of the possible effects of malfunctioning
of public sector banks (Ramu, N., 2009).
It has been examined that the reason behind the falling revenues from traditional sources is
78% of the total NPAs accounted in public sector banks (Bhavani Prasad, G. and Veena, V.D.,
2011).
An evaluation of the Indian experience in Financial Sector Reforms Published in the RBI
Bulletin gives stress to the view that the sustained improvement of the economic activity and
growth is greatly enhanced by the existence of a financial system developed in terms of both
operational and allocation efficiency in mobilizing savings and in channelizing them among
competing demands (G.Rangarajan, 1997).
It has been observed that the current banking Scenario and the need for the policy change,
opines that a major concern addressed by the banking sector reform is the improvement of the
financial health of banks. The Introduction of prudential norms is better financial discipline
by ensuring that the banks are alert to the risk profile of their loan portfolios (S.P.Talwar
(1998).
The Reserve Bank of India has also conducted a study to ascertain the contributing factors for
the high level of NPAs in the banks covering 800 top NPA accounts in 33 banks (RBI
Bulletin, July 1999). The study has found that the proportion of problem loans in case of
Indian banking sector always been very high. The problem loans of these banks, in fact,
formed 17.91 percent of their gross advances as on March 31, 1989. This proportion did not
include the amounts locked up in sick industrial units. Hence, the proportion of problem loans
indeed was higher. However, the NPAs of Indian Banks declined to 17.44 percent as on
March 31, 1997 after introduction of prudential norms. In case of many of the banks, the
decline in ratio of NPAs was mainly due to proportionately much higher rise in advances and
a lower level of NPAs accretion after 1992. The study also revealed that the major factors
contributing to loans becoming NPAs include diversion of funds for expansion,
diversification, modernization, undertaking new projects and for helping associate concerns.
This is coupled with recessionary trend and failure to tap funds in the capital and debt
markets, business failure (product, marketing, etc.), inefficient management, strained labour.
relations, inappropriate technology/technical problems, product obsolescence, recession
input/power shortage, price escalation, accidents, natural calamities, Government policies
like changes in excise duties, pollution control orders, etc. The RBI report concluded that
reduction of NPAs in banking sector should be treated as a national priority issue to make the
Indian banking system stronger, resilient and geared to meet the challenges of globalization
(Parul Khanna, 2012).
http://indianresearchjournals.com/pdf/IJMFSMR/2013/September/9.pdf
REVIEW OF LITERATURE
This section provides an overview of some of the existing literature with regard to the
NPA. This literature review helps me to better understanding of both research topics and
of the existing gap:
Khedekar Pooja S. (2012) A strong Banking Sector is essential for a flourishing
economy. Indian banking sector emerged stronger during 2010-11 in the aftermath of
global financial meltdown of 2008-10 under the watchful eye of its regulator. The level
of NPA's act as an indicator showing the credit risks & efficiency of allocation of
resource. NPA involves the necessity of provisions, any increase in which bring down
the overall profitability of banks. An excessive rise in interest rates over the past 18
months has led to a sharp increase in non-performing assets. This not only affects the
banks but also the economy as a whole. This paper deals with understanding the concept
of NPA, the causes and overview of different sectors in India.
Selvarajan B. and Vadivalagan, G.(2012) Over the few years Indian banking, attempts
to integrate with the global banking has been facing lots of hurdles in its way due to
certain inherent weakness, despite its high sounding claims and lofty achievements. In a
developing country, banking is seen as an important instrument of development, while
with the demanding Non-Performing Assets (NPAs), banks have become burden on the
economy. Non-Performing Assets are not merely non remunerative, but they add cost to
the credit Management. The fear of Non-Performing Assets permeates the psychology
of bank managers in entertaining new projects for credit expansion. Non-Performing
Assets is not a dilemma facing exclusively the bankers; it is in fact an all pervasive
national scourge swaying the entire Indian economy. Non Performing Asset is a sore
throat of the Indian economy as a whole. Non Performing Assets have affected the
profitability, liquidity and competitive functioning of banks and developmental of
financial institutions and finally the psychology of the bankers in respect of their
disposition towards credit delivery and credit expansion. NPAs do not generate any
income for the banks, but at the same time banks are required to make provisions for
such NPAs from their current profits. Apart from internal and external complexities,
increases in NPAs directly affects banks' profitability sometimes even their existence.
Meeker Larry G. and Gray Laura (1987) in 1983, the public was given its first
opportunity to review bank asset quality in the form of non-performing asset
assets of the four banking segments, namely, public sector, old private sector, new
private sector and foreign banks by studying the overall trends in NPAs. We have used
the Structure- Conduct-Performance (S-C-P) approach that shows the relationship
between competition and conduct, concentration and growth in NPAS. Our results show
that on an average across the banking industry segments, average non-performing assets
in the past 11 years have been declining at the rate of 13% p.a. compounded growth
rate. The old private sector banks' nonperforming assets have reduced at the rate of
11.98% and that of public sector banks have declined at the rate of 18% and foreign
banks at 11.4%. Though new private sector banks and the foreign banks seem to be
more efficient but their conduct does not show consistency and stability
Joseph, Mabvure Tendai Edson, Gwangwava(2012) The purpose of the study was to
find out the causes of non-performing loans in Zimbabwe. Loans form a greater portion
of the total assets in banks. These assets generate huge interest income for banks which
to a large extent determines the financial performance of banks. However, some of these
loans usually fall into non-performing status and adversely affect the performance of
banks. In view of the critical role banks play in an economy, it is essential to identify
problems that affect the performance of these institutions. This is because nonperforming loans can affect the ability of banks to play their role in the development of
the economy. A case study research design of CBZ Bank Limited was employed.
Interviews and questionnaires were used to collect data for the study. The paper
revealed that external factors are more prevalent in causing non-performing loans in
CBZ Bank Limited. The major factors causing nonperforming loans were natural
disasters, government policy and the integrity of the borrower.
Toor N.S. (1994) stated that recovery of non-performing as-sets through the process of
compromise by direct talks rather than by the lengthy and costly procedure of litigation.
He suggested that by constant monitoring, it is possible to detect, the sticky accounts,
the incipient sickness of the early stages itself and an attempt could be made to review
the unit and put it back on the road to recovery
S.N. Bidani (2002) Non-performing Assets are the smoking gun threatening the very
stability of Indian banks. NPAs wreck a banks profitability both through a loss of
interest income and write-off of the principal loan amount itself. This is definitive book
which tackles the subject of managing bank NPAs in it s entirely, starling right from the
stage of their identification till the recovery of dues in such ac-counts.
REVIEW OF LITERATURE
Sreedharan, (1996) analysed the performances of Indian baking industry for the year
1995 and 1996.The analytical exercise was carried out with reference to net worth,
liabilities, assets, income, expenditure, profitability and efficiency of different groups in
the banking system. It was revealed that by and large, the public sector banks lagged far
behind the foreign and private sector banks in respect of all the variables analysed. The
researcher suggested that the programmes and policies regarding commercial banks
should be redefined in such a way that that there exist a co-ordination between the
commercial viability and social responsibility of the public sector banks.Rangarajan,
C. (1997) RBI at the Bankers Training Centre of the Nepal Rashtra Bank Katmandu on
18th May 1997 addressed in his speech in respect of direct lending, there is a
prescription that 40% of the net bank credit should go to priority sector such as
agriculture, small scale industries, small business man and programmes for poverty
alleviation without affecting the viability and profitability of the bank. Speaker
emphasized on operational efficiency and allocation efficiency. Operational efficiency
relates to the transaction cost and allocation cost deals with the mobilized funds among
competing demand. Governors speech covered aspects such as Global experience,
reforms undertaken in India, Philosophy, strategy, policy frame work, improvement in
financial health, and institutional strengthening in India. Kohli, (1997) analysed the
impact of directed credit under priority sector on the profitability of commercial banks
in India. She brought into light the matters related to the directed credit which was not
solely responsible for the deterioration in the profitability and the poor quality of the
portfolio of the financial institutions. The researcher, however, has called for the reappraisal of the credit policy of India on the lines of the policies implemented in EastAsian countries. Mishra, T.P. (2003) revealed the high rise in gross and Net NPA of the
banking sector in the recent past as the exponential rate giving an indication, that the
ongoing recession was taking a heavy toll on corporate audit discipline. This was further
supported by recovery climate, legal system, approach of the lenders towards lending
and many other factors. Despite myriad problems and existing set up, bans had to
perform well and achieve the target for NPA reduction affixed as per international
standard.
policies e.g. Import duties., deficiencies like delay in the release of limits/ funds by banks /
FIs) and secondary factors (such as: Selection of the project, implementation of the project,
intention of the borrower, economic trend) responsible for high NPAs in banking sector.
Various steps have been taken to reduce NPAs. He concluded that Bank of India has
performed extremely well in NPA management. Persistent and follow-up of potential and
other NPAs with outstanding of Rs. 1 crore and above is being done through the introduction
of ACTION TAKEN REPORT (ATR) mechanism on periodical basis. Loan Restructuring
and Loan Review Cells have been established to set up restructuring exercise in all viable
cases expeditiously. Responsibilities have been assigned to monitor large NPAs (Rs l0Lakhs
and above) at administrative levels.