By the year 2001 the view was crystallised that a bulk segment of NPA consists of credit availed by big corporates, who are willful defaulters. This section of borrowers are able to prolong and continue to default repayment taking advantage of the deficiencies in the Legal framework. These views are conveyed in RBI Report of Banking for the year 2001 published on 15th November 2001.

Non-performing assets have been substantially reduced since regulation was tightened in 1993, but improvement has recently slowed down and the levels of NPAs remain high compared to international standards. In 2001, the commercial banking system's gross NPA to gross advances ratio was 11.4 per cent; net of provisions it was 6.2 per cent. The public sector banks' NPAs witnessed a decline in 2001, with the gross NPA to gross advances ratio being 12.4 per cent, as compared with14.0 per cent in 1999-2000; net of provisions, the corresponding figures were 6.7 per cent and 7.4 per cent, respectively.

An effective resolution of the problem of NPAs is hampered on account of a sizeable overhang component arising from infirmities in the existing process of debt recovery, inadequate legal provisions on foreclosure and bankruptcy and difficulties in the execution of court decrees. Any solution to the overhang problem of large magnitude requires well-crafted medium to long-term actions, devoted to specific definition of goals and negotiation of the process rather than ad hoc approaches.

Needless to mention, a lasting solution to the problem of NPAs can be achieved only with proper credit assessment and risk management mechanisms. For instance, in a situation of liquidity overhang, the enthusiasm of the banking system to increase lending could compromise on asset quality, raising concerns about adverse selection, and the potential danger of addition to the stock of NPAs. It is, therefore, necessary that the banking system is equipped with prudential norms to minimise, if not completely avoid the problem.

As regards internal factors leading to NPAs, the onus for containing the same rests with the banks themselves. This would necessitate organisational restructuring, improvement in managerial efficiency, skill upgradation for proper assessment of creditworthiness and a change in the attitude of the banks towards legal action, which is traditionally viewed as a measure of the last resort.

The issue of NPAs is closely related to the state of legal framework. The legal framework sets standards of behaviour for market participants, details about rights and responsibilities of transacting parties, assures that completed transactions are legally binding and provides regulators with the backing to enforce standards and ensure compliance and adherence to law.

At the policy level, there is the need for legislation, which will make recovery processes smoother and legal action quicker. Banks have been provided with a menu of alternatives such as Debt Recovery Tribunals (DRT), Lok Adalats and Asset Reconstruction Companies. A Credit Information Bureau has been established with a paid-up capital of Rs.25 crore, in order to coordinate sharing of information on the borrowers of credit institutions. The Reserve Bank has also provided indicative guidelines for compromise settlement of chronic NPAs in the small-scale sector. Settlement Advisory Committees have also been formed at regional and head office levels. Another method which has been proposed is Corporate Debt Restructuring (CDR). These alternatives will create the enabling environment for the appropriate legal reforms, which are being addressed jointly by the Reserve Bank and the Government of India.