• NPA – Indian Perspective

    According to the Reserve Bank of India, there are sectors which have created distressed assets, the major ones among them are  power distribution sector companies, airline sector and the telecom sector. According to the government sources, infrastructure projects will need $1 trillion in the coming five years. The power sector has caused more stress as compared to the other sectors. In order to revive from the damage caused by distressed assets, these sectors will need greater inflow of funds in the coming few years.

    The reason for increase in the number of Non-Performing assets is the increase in interest rates due to which the debt servicing ability of the corporate sector got reduced.

    Important Committees regarding NPA

    Numbers of Committees have given their recommendations regarding default loans from time to time.

    1. The Tandon Committee (1973): It was the first committee in Indian Banking sector to set a proper quality wise grading system for advance portfolio. This was followed by the Chore Committee (1980) which has recognized the need for close watching the quality of loan portfolio,

    2. Pendharkar Committee (1981): It recognized the need for classifying advances into various categories to index the overall quality of the portfolio of assets. It was the starting point for introducing the health coding system of categorical bank loan portfolio by the RBI in 1985.

    3. Narasimham Committee submitted its first report on November, 1991 and gave more specific criteria for prudential norms of a) asset classification, b) income recognition, and c)provisioning and capital adequacy norms.

    The Narasimham committee has recommended prudential norms on assets classification, income recognition and provisioning.   Income is not recognized on accrual basis but it is booked as income only when it is actually received.

    Depending on the type of default the assets are classified as under:

    • Standard assets: These are assets which earn interest regularly and are treated as good advances.
    • Substandard assets: These assets come under the category of NPA for a period less than 12 months.
    • Doubtful assets: These are the assets which remained non- performing for more than one year.
    • Loss assets: The assets which are virtually incurring loss for the bank and have to be written off out of the profits earned by the bank. The committee had recommended that assets classified under last three categories are to be considered as NPAs.

    4. Narasimham Committee gave its second report in 1998. It strongly opposed the merger of strong banks with weak banks as this would cause a negative impact on the quality of assets of the stronger bank because of the “contaminated portfolios” of the weak banks. The committee has not given any suggestions to deal with the extremely high nonperforming assets of Indian banks, but has suggested that the idea of an Asset Reconstruction Fund be considered.

    Steps taken India to lower NPAs

    The key steps taken in India to lower NPAs are:

    • Enactment of the Companies Act (Second Amendment), 2002 so as to strengthen the existing corporate rehabilitation mechanism.
    • Enactment of the Securitization of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI).
    • Setting up of the Asset Reconstruction Company of India Ltd (ARCIL), jointly by State Bank of India, IDBI Bank and ICICI Bank.
    Post Tagged with ,

Leave a Reply

Your email address will not be published. Required fields are marked *