Non-Performing Assets

In a Liberalizing economy banking and financial sectors get the highest priority. But Indian banking sector is
having serious problems due to its Non-Performing Assets (NPAs). The NPAs are presently being defined 'as an
advance for which interest or repayment of principal or both remain outstanding for a period of more than two
quarters. The level of NPAs acts as an indicator showing bankers credit risks and efficiency of allocation of
financial resources. It is alarming to note that the NPAs of the Indian banking sector have been incessantly rising
in the past one year.
Historically, in 1997, NPAs were 15.8% of loans for the banking sector, which nosedived to 2.4% in 2008. This
figure stands at 2.94% of loans in 2012. In absolute figures, NPAs have doubled from 2009 to 2012 and assets
under reconstruction had trebled during the same period. India's biggest lender, State Bank of India, is
experiencing an NPA level of 4.99% of total loans. According to a recently published media report, 10 large
industrial houses account for 13% of total assets financed by the-Banking system, which means that bank
lending is getting increasingly skewed. Further, of the total reconstructed assets, 8.24% belong to the large
manufacturing sector, 3.99% are from the services sector while 1.45% are from the agricultural sector. The
Finance Minister has been repeatedly stressing upon the need to reduce NPA to 1%.
Reasons for growing NPAs
1. Economic slowdown - The global economy is still in the throes of an economic crisis. The GDP growth of
current year is forecasted at 5% which is the lowest in this decade. There is a general slackening of
domestic economic activity in India both in manufacturing and the services sectors. A sluggish economy
will have a direct impact on the balance sheets and profitability of many firms who have availed of loans
from the banking industry. Over a period of time, some of the hard hit firms will be compelled to default
on their loans. There is a groundswell of expert opinion in our country that NPAs are more an outcome
of economic factors rather than any internal systemic failures.
2. High interest rates - It is a known fact that interest rates have been revised upwards,10 times in the past
two years with a view to curb inflation. High Interest rate increases the cost of funds to the credit users
and has a debilitating effect especially on the repayment capacity of small and medium enterprises.
Banks need to maintain their Net Interest Margin and hence pass on any interest rate hike to the
borrowers. A high rate of inflation dilutes the quality of assets of the banking sector. Weak supply
demand scenario, high borrowing or leveraging and intense competition contribute to loan defaults.
3. New Reporting System- Indian banks are to report NPAs from April 2012 in a computer
recognized/identified format. It is stated that almost 90% of all banks loan portfolio is under the
computerized system of NPA reporting or system based reporting. The discretion of bank managers in
classifying assets according to their local judgment is eliminated. This change in reporting pattern makes
identification of NPAs a machine driven, objective activity.
4. Aviation sector - The Indian banking system has a total exposure of around Rs. 40,000 crores to the
ailing aviation sector. SBI alone has an exposure of 5,000 crores to the aviation industry. It is common
knowledge that many airlines are either in the red or marginally profitable. According to an RBI report,
nearly three-fourths of the top Banks' loans to the aviation sector are either impaired or restructured.
Kingfisher airlines and Air India have been the significant aviation borrowers whose performance is
below par.

Another contributing factor to rise in NPAs is the corporate debt restructuring that was witnessed in sectors like
energy, telecom etc. due to high interest rates, volatile currency and commodity markets. Various studies have
been conducted to analysis the reasons for NPA but complete elimination of NPA is impossible.
Recently, as per a media report the gross NPAs in respect of Private Sector Banks for the period December,
2011, over the period December, 2010, has increased from Rs, 18,451.36cr to Rs. 18,940.14cr in absolute terms.
The gross NPAs in respect of Public Sector Banks have increased from Rs. 68,597.09cr to Rs. 103,891.27cr over
the same period. The Government is well aware of the problem but not taking it seriously enough. The approach
of the Government can be understood by a statement made by the Union Finance Minister recently that the
problem of growing NPAs in Indian banks is marginal in nature and the impending economic recovery would
certainly arrest this trend;'
As an example the status of one premier bark i.e. SBI can be cited. SBI is the hardest hit by loan defaults among
Indian banks. Its gross non-performing assets (NPAs) rose to Rs.53, 457cr or 5.3% of its loans. In percentage
terms, Central Bank of India has higher bad loans (5.64%), but in absolute terms, its gross bad loans are Rs.
8,938cr.
This petition is necessitated because of lackadaisical, evasive, confusing and unsatisfactory measures taken by
the Government to redress such an important issue which has far reaching impact in future on the Indian
economy. The Indian banking sector is facing a serious problem of NPAs and it is comparatively higher in public
sectors banks, as stated above. To improve the efficiency and profitability, the NPA has to be scheduled. Various
stringent steps have to be taken by Government to reduce the NPA. It is highly impossible to have zero
percentage NPA but at least our Indian banks can try competing with foreign banks to international standard.
And accordingly your petitioner prays that:
1. Government should take immediate steps to correct the increasing NPAs;
2. There should be a proper mechanism in place to ensure that banks dont resort to cover bad debts and
lower income by making higher provisions for NPAs and thus affecting the financial health of banks;
3. Huge variations in reporting of NPAs on charge of CMDs needs to be investigated. The change of CMD of
State Bank of India and Bank of Baroda in recent times showed that there is fudging of accounts
resulting in auditing malpractices; and
4. Exposure to real estate sector be reduced to large builders/developers however, retail loans to end
users or individual home buyers be encouraged so that economic activity is enhanced and NPAs don't
increase.
5. Complete details of the recovery and write off for the last six financial years, bank-wise may be
produced and explanation may be sought from each bank for the write off so that the trend can be
analyzed and implementable solutions are offered by the Petitions Committee.
6. The non-official Directors of Public Sector Bank should be given more powers and they should play
proactive role in governance checks and ensure pursuance of an effective' recovery process.
7. A study may be made of the efficacy of the Debt Recovery Tribunals in recovering bad debts and suitable
modifications be made to make DRTs more effective.
8. Cases of NPAs are being settled in connivance with the Bank Management through a mechanism which
is in violation of RBI norms. This needs to be checked and an institutional mechanism needs to be put in
place where settlement of bad debts is done in the utmost transparent manner.