Non-Performing Assets (NPAs) are assets which are due by the borrower in the form of principal and interest that is not paid for 90 days. Almost all the banking and financial institutions are facing the mounting pressure of NPAs. But in recent years, the recovery of NPAs has started gradually. There is a significant growth of bank credit for the financial year 2004-05. As on March 18, 2005 the annual credit grew 26.2% as compared to 16% growth in the previous year. As there is a huge credit growth, banks today consider NPAs seriously.
Many reasons are attributed to the growth in volumes of NPAs in the banking systems. These can be categorized into two categories-External and Internal. Credit appraisal, sanction and past sanction supervision, risk management systems introduced in the bank, credit recovery processes being implemented in the respective banks and motivation level of the staff in monitoring and recovery of bad advances are internal factors which can be addressed by the respective bank managements. The cyclical nature of the economy, legal, regulatory mechanisms being implemented in the banking system as political and ethical values in the society are external determinants of NPAs in the banking system. Both these factors have bearing on the decrease/increase of NPAs in banking system.
At end-March 2005, there was a remarkable decline in gross NPAs to gross advances ratio to 5.2% as compared to 7.2% at end-March 2004. This is due to improvement in recovery of the NPAs as well as sharp increase in gross loans and advances of Scheduled Commercial Banks (SCBs).If we look at the composition of NPAs, the substandard assets declined sharply, while the quantum doubtful assets increased. This is due to new definition of NPAs and asset categorization norms from the year ended March 2005. According to the new norms, assets are declared as doubtful if they continue as NPA for 12 months. But earlier it was fixed for 18 months.
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