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The main reason behind NPA is default borrowers. There are two sets of policies involved relating to deal with NPAs. It could be for existing NPAS or for reducing fresh NPAS generation.
The major duty of the banking sector is to grant credit for economic activities in various sectors. Apart from this raising fresh funds, recycling of funds and receiving back from borrowers are also an integral part of the banking sector. So a strong banking sector is important for a flourishing economy. The bank encourages people for lending money however it also carries a credit risk which arises if the borrower fails to repay. The major hurdle is non-recovery of loans with interest in the credit cycle. Such losses impact the bank’s profitability and hence the failure of the banking sector can have an adverse impact on other sectors.
If we consider INDIA, the NPA is set to be worsened. There are more than Rs.7 lakh crore worth loans are classified as Non-Performing Loans in India. This is a huge amount.it is nearly 10% of all loans given. This means that about 10% of loans are never paid back, which is a substantial loss of money to the banks. If we add restructured and unrecognized assets then the total stress would be 15-20% of total loans. Restructuring norms are being misused. This bad performance is not a good sign and can result in crashing of banks as happened in the sub-prime crisis of 2008 in the United States of America.
The problem India Faces is not lack of strict prudential norms but because of the legal impediments and time-consuming nature of asset disposal proposal, Postponement of the problem in order to show higher earnings and also because of manipulation of debtors using political influence.
The banking sector had witnessed an NPA crisis in the mid to late 1990s. The surge in bank NPAs at that time took place in the aftermath of the introduction of robust income recognition and asset classification norms which exposed two decades of bad loans. There are a lot of practical problems have been found in Indian banks, especially in public sector banks. For Example, During Prime Minister Mr.V.P.Singh’s leadership, the govt. of India had given a massive wavier of Rs.15, 000 Crs. for rural debt during 1989-90. This was not a single incident in India.
Poverty elevation programs like IRDP, RREP, SUME, SEPUP, JRY, PMRY etc., failed on various grounds in meeting their objectives. The huge amount of loan granted under these schemes was never come back due to political manipulation, misuse of funds and non-reliability of the target audience of these sections. Loans given by banks are their assets and as the repayment of several of the loans was poor, the qualities of these assets were steadily deteriorating. Credit allocation became ‘Lon Melas’, loan proposal evaluations were slack and as a result, repayment was very poor. Recently SBI faced NPI issues.For example when it gave a loan of Rs.9000 crore to a company (E.g.: Kingfisher Airlines). Assume that bank imposed an interest rate of say 10% per annum. Now suppose that initially everything was good and the market forces were supporting the airline industry, thus, Kingfisher was able to pay the interest amount. Later on, because of administrative, technical or corporate reason. The company could not pay the interest rates for 90 days. In that case, a loan given to the Kingfisher Airlines is a good case for the consideration as NPA.
There are several reasons for an account becoming NPA.
Bank follows three cardinal process that is, Principles of safety, Principle of liquidity, Principles of profitability. Principles of safety mean that the borrower is in a position to pay back the loan, including both principal and interest. The refund of loan depends upon the borrowers, Capacity to pay and Willingness to pay. The Capacity to pay depends upon, Tangible assets, Success in business. The Willingness to pay depends on, Character, Honest, Reputation of the borrower.
The technology and management information system plays a vital role in. if these technologies would be improper then market-driven decisions on a real-time basis cannot be taken. As of now proper MIS and financial accounting system are not implemented in the banks, which effects to poor credit collection, so NPA, therefore all the branches of the bank should be computerized.
The banker should do strength, weakness, opportunity and threat analysis properly. Inappropriate Swat analysis is another reason for the increase in NPAs.Before providing unsecured advances banks should consider the borrowers own capital investment and the bank should collect credit information of the borrowers from credit rating agencies(CIBIL Score).Apart from that balance sheet needs to be check which shows the true picture of the business.It will reveal on analysis of profit/loss a/c and balance sheet.
The credit appraisal is an extra factor for the increase in NPAs.If the credit appraisal is poor; the bank gives advances to those who are not able to repay it back.
It is the job of the banker to select the borrower very cautiously and should take tangible assets as security to safeguard its interests. When accepting securities, banks should consider the Marketability, Acceptability, Safety, Transferability etc. The banker should follow the principle of diversification of risk; it should not give a loan to some particular big firms.
The irregular follows up by bank officials to the customer point decreases the collection of interest and principals on the loan. Apart from that, there are other internal factors from the customer’s point of view:
There are numbers of recovery tribunals, which work for the recovery of loans and advances. However, because of their carelessness and ineffectiveness in their work, the bank suffers the consequence and hence it reduces their profitability and liquidity.
This kind of borrowers who are able to pay back loans but are reluctant to do it. They should be recognized and proper measures should be taken in order to get back the money given to them as loans or advances.
Natural calamities are a factor which no one can ignore, and India has suffered several times because of these issues, hence this makes borrowers helpless and them unable to pay back their loans. Mostly our farmers depend on rainfall for cropping. When an irregularity of rainfall occurs, the farmers are not able to meet the production level thus they are not repaying the loans.
If there would be inappropriate project handling, ineffective management, lack of adequate resources, lack of advanced technology, day to day changing govt. Policies, it will lead to producing industrial sickness.
Indian Entrepreneurs could not predict their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities.
With every new govt. banking sector gets new policies (excise duty changes, Import duty changes) for its operation, so it has to cope with the changing principles and policies for the regulation of the rising of NPAs.
Apart from the above factors, changes in labor law, Scarcity of raw material, power and other resources, recession in industries cause un-ability to repay by the customer.
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