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The flagrant size of Non-Performing Assets (NPAs) has been creating panic in the banking industry. With a view to overcoming the menace of NPAs, various research studies have been conducted in India and abroad. Several groups, from time to time, made many recommendations, quite many of which were accepted by the Reserve Bank of India for implementation. In a study on loan losses of the US banks, McGoven (1998) found that ‘character’ is a paramount factor of credit and a major determinant in the decision to lend money. In a study on non-performing loans in Italy, Sergio (1996) found evidence that risk of loan assets is rooted in a bank’s lending policy adducing to relatively unselective and inadequate assessment of sectoral prospects. Interestingly, this study refuted that business cycle could be a primary reason for bank’s non-performing loans. Sudhakar (1998b) undertook an in-depth analysis of policies followed by the banks with a focus on public sector banks since their NPA level was considerably high. He made an attempt to relate incidence of NPAs to the industry’s geographical area, scheme of finance, sector, etc. Siddiqi et al. (1999) found that the diversion of funds like expansion, diversification, modernization or promoting sister concerns, etc. was the most prominent reason for the growth of NPAs. Muniappan (2002) also found that the problem of NPAs is related to several internal and external factors confronting the borrowers. The internal factors are diversion of funds for expansion/diversification/modernization, taking up new projects, helping/promoting associate concerns, time/cost overruns during the project implementation stage, business failure, inefficient management, strained labor relations, inappropriate technology/technical problems, product obsolescence, etc., while external factors are recession, non-payment in other countries, inputs/power shortage, price escalation, accidents and natural calamities.
In a study of non-performing loans of India’s pubic sector banks, Das and Ghosh (2003) performed an empirical analysis of NPAs by considering various indicators such as asset size, credit growth, and macroeconomic condition and operating efficiency indicators.
Though RBI and various committees have suggested several prudential measures, the banks still continue to face piled-up NPAs. The present study envisages the key factors responsible for rising NPAs. The study also tries to investigate institutional and geographical biases in terms of size and composition of NPAs.
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