Critical analysis of Non-Performing Assets

Non-Performing Assets

In every country, whether it is democratic or not have their economy and every country’s economy depends on the banking sector and hence it can be said that the banking sector is the backbone of India’s economy also.  Economy sustenance is measured through the banking sector of any particular nation. There is a perspective called Non-Performing Assets (NPA), and this has been threatening the harmony of banking system operations and in the current scenario, NPA is increasing year by year which is a very debatable topic.

What actually non-performing assets means?

Basically bank’s assets are the loans and advances given to customers and in respect of which bank are be given the interest by the customers and if customers did not repay the loan and did not pay the interest, it will turn into bad loans.

The most simple meaning of NPA is that these are those assets of bank which did not perform and did not return anything.

Terms loans on which interest or installment of principal remain overdue for a period of more than 90 days from the end of a particular quarter is called Non-performing assets. (Definition is given by the RBI)

Non-performing assets are assets that cease to generate income through interest earned on the principal loan amount and the repayment of the principal loan amount.  This outcome comes when the borrower intentionally defaults on the loan payment or is unable to pay due to the economic situation affecting his business. Bank’s overall efficiency is reflected through NPAs while performing its business of converting deposits into loans and recovering these loans. Non-recovery or partial recovery of loans has an impact on the bank’s balance sheet and income statement items in the form of a reduction in interest earned on loan assets, an increase in the provision on NPAs, an increase in capital requirement and lower profits. Hence, rising NPAs are a concern for a bank and determinants of NPAs should be identified prior to loans turning into NPAs.

Some basic reasons behind creation of non-performing assets

NPAs are always known by the term called “Bad Loans” or sometimes defaults. These defaults can occur due to some reasons:

✔ Bad lending practices by banks.

✔ A banking crisis.

✔ Overhang component (due to environmental reasons, business cycle, etc.)

✔ Incremental component (due to internal bank management, like credit policy, terms of credit, etc.)

Reason behind increase in non-performing assets

1. GDP slowdown– During the period of 2000 and 2008  Indian economy were in the boom phase especially,  Public sector banks lent extensively to corporate but the profits of most of the corporate dwindled due to slowdown in the global economy, the ban in mining projects, and delay in environmental related permits affecting power, iron and steel sector, etc. which has affected the most and this was the major reason behind the increase in NPA.

2. There are 5 sectors Textile, Aviation, Mining, Infrastructure contributes to most of the NPA, since most of the loans given in this sector are by PSB and hence they account for most of the NPAs.

3. Public Sector banks provide around 80% of the credit to industries and it is this part of the credit distribution that forms a great chunk of NPA. Last year, when kingfisher was marred in the financial crisis, SBI provided it a huge amount of loans which it is not able to recover from it.

4. It is considered that the main reason for the rise in NPA in Public sector banks was Priority sector lending but according to the findings of the Standing Committee on Finance NPAs in the corporate sector are far higher than those in the priority or agriculture sector and hence private sector lending also contributes much to NPAs. As per the latest estimates by the SBI, education loans constitute 20% of its NPAs.

5. The Lack of Bankruptcy code in India and the sluggish legal system make it difficult for banks to recover these loans from both corporate and non-corporate.

6. There was a general slowdown in the economy after 2011 in India has resulted in the faster growth of NPAs.

7. Severe Competition in any particular market segment for the example telecom sector in India. Due to mal-administration by the corporate for example, wilful defaulters.

Major impacts of NPA?

1. Lenders (who provide loans) will suffer a lowering of profit margins.

2. When there will be a stress in the banking sector due to less availability of money will have a major impact on the larger national economy.

3. When there will be less availability of money in the banks, banks will start giving loans on the higher rates of interest to maintain the profit margin.

4. One of the major impacts is unemployment because investments got stocks.

5. There is a pendency of cases in the judiciary and if the cases related to NPAs will increase will ultimately lead to pressure on the judiciary.

Steps taken by government to control NPA

The case of NPA is not new in India so to tackle this problem the government has taken several steps on the level of legal, financial, policy reforms. In the year 1991 NARSIMHAN committee recommended several reforms to tackle this problem.

Some of the recent reforms which were taken:

Joint Lenders Forum – 2014

It was created by the inclusion of all PSBs whose loans have become stressed. It is present so as to avoid loans to the same individual or company from different banks. It is formulated to prevent instances where one person takes a loan from one bank to give a loan to the other bank.

Mission Indradhanush – 2015

The Indradhanush framework for transforming the PSBs represents the most comprehensive reform effort undertaken since banking nationalization in the year 1970 to revamp the Public Sector Banks (PSBs) and improve their event them from becoming stressed by appropriate action to improve overall performance by ABCDEFG method. This method is explained below briefly.

A-Appointments: Based upon global best practices and as per the guidelines in the companies act, separate posts of Chairman and Managing Director and the CEO will get the designation of MD & CEO and there would be another person who would be appointed as non-Executive Chairman of PSBs.

B-Bank Board Bureau: The BBB will be a body of eminent professionals and officials, which will replace the Appointments Board for the appointment of Whole-time Directors as well as non-Executive Chairman of PSBs

C-Capitalization: As per finance ministry, the capital requirement of extra capital for the next four years up to FY 2019 is likely to be about Rs.1,80,000 crore out of which 70000 crores will be provided by the GOI and the rest PSBs will have to raise from the market.

Financial Year Total Amount

FY15-16          25,000 Crore

FY16-17          25,000 Crore

FY17-18          10,000 Crore

FY18-19          10,000 Crore

Total    70,000 Crore

D-Destressing: PSBs and strengthening risk control measures and NPAs disclosure.

E-Employment: GOI has said there will be no interference from Government and Banks are encouraged to take independent decisions keeping in mind the commercial the organizational interests.

F-Framework of Accountability: New KPI(key performance indicators) which would be linked with performance and also the consideration of ESOPs for top management PSBs.

G-Governance Reforms: For Example, Gyan Sangam, a conclave of PSBs and financial institutions. Bank board Bureau for transparent and meritorious appointments in PSBs.

Asset Quality Review – 2015

Classify stressed assets and provisioning for them so as the secure the future of the banks and further early identification of the assets and provide the overall performance.

Insolvency and Bankruptcy code Act-2016

It has been formulated to tackle the Chakravyuaha Challenge (When the Indian economy characterized by new markets without exit of old ones) of the exit problem in India. The aim of this law is to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders by consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner and for maximization of value of assets of such persons and matters connected therewith or incidental thereto.

Public ARC vs. Private ARC – 2017

This debate is recently in the news which is about the idea of a Public Asset Reconstruction Companies (ARC) fully funded and administered by the government as mooted by this year’s Economic Survey Vs. the private ARC as advocated by the deputy governor of RBI Mr. Viral Acharya. Economic survey calls it as PARA (Public Asset Rehabilitation Agency) and the recommendation is based on a similar agency being used during the East Asian crisis of 1997 which was a success.


Now the time has come to curb this problem because already so many things and repercussions have been faced by the Indian economy due to this and there is a need to take some urgent remedial measures which can be related to technology and data analytics to identify the early warning signals. There are some cases in which NPA which are hidden and they are needs to be identified so there should be some mechanisms to reduce this kind of menace. For the credit assessment, there should be some development of internal skills and there should be some forensic audits to understand the intent of the borrower.  Since there is a decrease in NPA in the recent financial year due to the measures taken by the government and so if there will be proper implementation then this will help more to reduce the crisis of NPA.

“The views of the authors are personal

Frequently Asked Questions

What are the types of Non Performing Assets?

There are various types of NPA most of them are:

a)         Standard Assets

b)         Sub Standard Assets

c)         Doubtful Assets

d)         Loss Assets

When an asset is qualified as a doubtful asset?

Assert is qualified as doubtful if it remains as Non-Performing Asset for more than 12 months.





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Bhumitra Dubey
My name is Bhumitra Dubey a student of Dharmshastra National Law University in semester 2 nd. I am pursuing B.A.LLB. as my career option. I live in Chhatarpur (M.P.). I have done my schooling from Chhatarpur. My experience at university is very enriching. I am actively involved in practical projects, get opportunities to participate in a number of curricular activities like MUN, Debate, Chai PE harcha, International Conference. My active participation in writing has taught me many skills. I was also a member of Indian edition Week as a volunteer. I have been working in RLEk (Rural Litigation Entitlement Kendra) in Dehradun as an intern. Now I got the opportunity to join in your organization to explore new dimensions and for further development of my skills.