Deficiency in Indian

Banking Sector and

Non-Performing
Assets
ByTanveer Kaur

Deficiencies in banking
sector

Banking remained internationally isolated (few Indian banks

had presence abroad in international financial centers)
because of preoccupations with domestic priorities,
especially massive branch expansion and attracting more
people to the system.
The banking systems international isolation was also due
to strict branch licensing controls on foreign banks already
operating in the country as well as entry restrictions facing
new foreign banks.
A criterion of reciprocity is required for any Indian bank to
open an office abroad.
A big challenge facing Indian banks is how, under the
current ownership structure, to attain operational efficiency
suitable for modern financial intermediation.

Causes of deficiencies
Deregulation:This continuous deregulation has made the
Banking market extremely competitive with greater
autonomy, operational flexibility. The deregulation of the
industry coupled with decontrol in interest rates has led to
entry of a number of players in the banking industry. At the
same time reduced corporate credit off take thanks to
sluggish economy has resulted in large number of
competitors batting for the same pie.
New rules:As a result, the market place has been redefined
with new rules of the game. Banks are transforming to
universal banking, adding new channels with lucrative pricing
and freebees to offer. Natural fall out of this has led to a
series of innovative product offerings catering to various
customer segments, specifically retail credit.

 Efficiency:Banks need to access low cost funds and

simultaneously improve the efficiency. The banks are
facing pricing pressure, squeeze on spread and have to
give thrust on retail assets.
Diffused Customer loyalty:This will definitely impact
Customer preferences, as they are bound to react to the
value added offerings. Customers have become
demanding and the loyalties are diffused. There are
multiple choices, the wallet share is reduced per bank with
demand on flexibility and customization. Given the
relatively low switching costs; customer retention calls for
customized service and hassle free, flawless service
delivery.

 Misaligned mindset:These changes are creating

challenges, as employees are made to adapt to changing
conditions. There is resistance to change from employees and
the Seller market mindset is yet to be changed coupled with
Fear of uncertainty and Control orientation. Acceptance of
technology is slowly moving in but the utilization is not
maximized.
Competency Gap:Placing the right skill at the right place
will determine success. The competency gap needs to be
addressed simultaneously otherwise there will be missed
opportunities. The focus of people will be on doing work but
not providing solutions, on escalating problems rather than
solving them and on disposing customers instead of using the
opportunity to cross sell.

Other Challenges:Beside the above said challenges Indian

banking sector is facing some other challenges too:
Implementation of Basel II
Implementation of latest technology
How to reduce NPA
Corporate governance
Man power planning
Talent management
Loan waiver: A new challenge
Risk management
Transparency and disclosures
Challenges in banking security
Growth in business
Enhancing customer service
Financial Inclusion
Coping up with new IFRS


Non-Performing Assets in Indian Banks
An asset is classified as Non-performing Asset (NPA) if
due in the form of principal and interest are not paid by
the borrower for a period of 180 days. If any advance or
credit facilities granted by banks to a borrower
becomes non-performing, then the bank will have to
treat all the advances/credit facilities granted to that
borrower as non-performing without having any regard
to the fact that there may still exist certain advances /
credit facilities having performing status. NPA connotes
a financial asset of a commercial bank, which has
stopped earning an expected reasonable return, it is
also a reflection of the productivity of the unit, firm,
concern, industry and nation where that asset is idling.

Causes for Non-Performing

Assets
Internal factors:
1.Funds borrowed for a particular purpose but not use for the said
purpose.
2.Project not completed in time.
3.Poor recovery of receivables.
4.Excess capacities created on non-economic costs.
5.In-ability of the corporate to raise capital through the issue of equity
or other debt instrument from capital markets.
6.Business failures.
7.Diversion of funds for expansion\modernization\setting up new
projects\ helping or promoting sister concerns.
8.Willful defaults, siphoning of funds, fraud, disputes, management
disputes, mis-appropriation etc.,
9.Deficiencies on the part of the banks viz. in credit appraisal,
monitoring and follow-ups, delay in settlement of payments\ subsidiaries
by government bodies etc.

 External factors:
1.Sluggish legal system
2.Scarcity of raw material, power and other
resources.
3.Industrial recession.
4.Shortage of raw material, raw material\input price
escalation, power shortage, industrial recession,
excess capacity, natural calamities like floods,
accidents.
5.Failures, non payment\ over dues in other
countries, recession in other countries, externalization
problems, adverse exchange rates etc.
6.Government policies like excise duty changes,
Import duty changes etc.,