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Indian Banking System The Emergence of NPA in Indian Banking & Financial Institutions and its Dimensions Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressing signals on the sustainability and endurability of the affected banks. The positive results of the chain of measures effected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this contemporary period have been neutralised by the ill effects of this surging threat. Despite various correctional steps administered to solve and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. The severity of the problem is however acutely suffered by Nationalised Banks, followed by the SBI group, and the all India Financial Institutions. As at 31.03.2001 the aggregate gross NPA of all scheduled commercial banks amounted to Rs.63,883 Crore. Table No.I gives the figures of gross and net NPA for the last four years. It shows an increase of Rs.13,068 Crore or more than 25% in the last financial year, indicating that fresh accretion to NPA is more than the recoveries that were effected, thus signifying a losing battle in containing this menace.
The apparent reduction of gross NPA from 14.4% to 11.4% between 1998 and 2001 provides little comfort, since this accomplishment is on account of credit growth, which was higher than the growth of Gross NPA and not through appreciable recovery of NPA. There is neither reduction nor even containment of the threat. The gross NPA and net NPA for PSBs as at 31.03.2001 are 12.39% and 6.74% are higher than the figures for SCBs at 11.4%and 6.2%. Comparative figures for PSBs, SBI Group and Nationalised Banks are as under.
Further it is revealed that commercial banks in general suffer a tendency to understate their NPA figures. There is the practice of 'ever-greening' of advances, through subtle techniques. As per report appearing in a national daily the banking industry has under-estimated its non-performing assets (NPAs) by whopping Rs. 3,862.10 Crore as on March 1997. The industry is also estimated to have under-provided to the extent of Rs 1,412.29 Crore. The worst "offender" is the public sector banking industry. Nineteen nationalised banks along with the State Bank of India and its seven associate banks have underestimated their NPAs by Rs 3,029.29 Crore. Such deception of NPA statistics is executed through the following ways.
Essentially arising from the wrong classification of NPAs, there was a variation in the level of loan loss provisioning actually held by the bank and the level required to be made. This practice can be logically explained as a desperate attempt on the part of the bankers, whenever adequate current earnings were not available to meet provisioning obligations. Driven to desperation and impelled by the desire not to accept defeat, they have chosen to mislead and claim compliance with the provisioning norms, without actually providing. This only shows that the problem has swelled to graver dimensions. The international rating agency Standard & Poor (S & P) conveys the gloomiest picture, while estimating NPAs of the Indian banking sector between 35% to 70% of its total outstanding credit. Much of this, up to 35% of the total banking assets, as per the rating agency would be accounted as NPA if rescheduling and restructuring of loans to make them good assets in the book are not taken into account. However RBI has contested this dismal assessment. But the fact remains that the infection if left unchecked will eventually lead to what has been forecast by the rating agency. This invests an urgency to tackle this virus as a fire fighting exercise. Financial institutions have not far lagged behind. NPAs of ten leading institutions have reported a rise of 11.89 per cent, or Rs 1,929 Crore, to Rs 18,146 Crore during the year ended March 2000 from Rs 16,217 Crore last year. The NPA statistics of the three leading Financial Institutions for the last two years are given in Table-5 IDBI tops the list by notching up bad loans worth Rs 7665 Crore by March 2000. In fact, its NPAs have gone up by Rs 1,185 Crore from Rs 6,490 Crore in the previous year. IFCI followed with NPAs of Rs 4,103 Crore, but it reported fall of Rs 134 Crore from the previous year's level of Rs 4,237 Crore. ICICI's NPAs went up to Rs 3,959 Crore from Rs 3,623 Crore in the previous year.
NPA is a brought forward legacy accumulated over the past three decades, when prudent norms of banking were forsaken basking by the halo of security provided by government ownership. It is not wrong to have pursued social goals, but this does not justify relegating banking goals and fiscal discipline to the background. But despite this extravagance the malaise remained invisible to the public eyes due to the practice of not following transparent accounting standards, but keeping the balance sheets opaque. This artificially conveyed picture of 'all is well' with PSBs suddenly came to an end when the lid was open with the introduction of the prudential norms of banking in the year 1992-93, bringing total transparency in disclosure norms and 'cleansing' the balance sheets of commercial banks for the first time in the country. In the peak crisis period in early Nineties, when the first Series of Banking Reforms were introduced, the working position of the State-owned banks exhibited the severest strain. Commenting on this situation the Reserve Bank of India in its web-site has pointed out as under:
Consequently PSBs in the post reform period came to be classified under three categories as -
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