Today NPA in the banking sector may be termed as an asset not contributing to the income of the bank. NPA is part of the operational risk of the banking industry. The problem of NPAs has secured an important place not only in the realm of regulatory policy discussion in banking, but also in general public discussions on the safety and soundness of banks and financial institutions.
The quality of a bank’s loan portfolio can impact its profitability, capital and liquidity. Asset quality problems are at the root of other financial problems for banks, leading to reduced net interest income and higher provisioning costs. If loan losses exceed the Bad and Doubtful Debt Reserve, capital strength is reduced. The biggest ever challenge that the banking industry today faces is management of the NPAs. The NPAs in PSBs are growing not only due to external factors like ineffective recovery tribunals, willful defaults, natural calamities, industrial sickness, lack of demands, labour problems, changes in the government policies etc. but also internal factors like managerial deficiencies, inappropriate technologies, poor credit appraisal systems, improper SWOT analysis, absence of regular industrial visits etc. It is now clear that there are various internal and external factors behind the NPAs in Banks. Lack of proper supervision, monitoring and follow-up is one of the responsible for increasing ration of NPA in Banks. Lack of awareness and basic education in many parts of the rural and semi-urban areas have added to the problem. Today the quality of the loan assets is most important factor for the basic viability of the banking system. The overdue advances of banks in India are mounting and in consequence the NPAs in their portfolio are on the rise, impinging on the banks viability.
It is very important that only specialised technical staff, equipped with the latest marketing information and technological developments at the bank level deal with the matter. There are cases where the borrower furnish incorrect position of the operations and stock statements owing to the fear that admission of the true position they would precipitate bank action on the other bank in spite of knowing that the unit is vague they feels satisfied and reassured by the fact that stock statements shows its security at least on the paper and thus such accounts turn NPAs. Now it is a common experience of a banker that without a proper monitoring and follow-up, performing advances may be converted into non-performing assets. There is an urgent need to prepare specialized teams who can deal with the recovery and for reducing the further NPAs in banks. Rising Bad loans are a concern for banks as they have to set aside more money in the form of provisions to cover such loans. The higher this amount, the more is the impact on profits. This will affect profitability as banks do not earn any interest on bad loans and, on top of that, they need to set aside money for such loans. Avoidance of loan losses is one of the pre occupations of management of banks. While complete elimination of such losses is not possible, bank managements aim to keep the losses at a low level. In fact, it is the level of NPAs which to a great extent differentiate between a good and a bad bank.
(This is the first part of the Diary and the rest of the article will continue tomorrow.)
(The views expressed by the author in the article are his/her own.)