Npas in Retail Loan Market

Management of Non-Performing Assets in Indian Public Sector Banks with special

reference to Jharkhand

Abstract

I. Introduction

The banking industry has undergone a sea change after the first phase of economic liberalization in

1991 and hence credit management. While the primary function of banks is to lend funds as loans to

various sectors such as agriculture, industry, personal loans, housing loans etc., in recent times the

banks have become very cautious in extending loans. The reason being mounting non-performing

assets (NPAs). An NPA is defined as a loan asset, which has ceased to generate any income for a bank

whether in the form of interest or principal repayment. As per the prudential norms suggested by the

Reserve Bank of India (RBI), a bank cannot book interest on an NPA on accrual basis. In other words,

such interests can be booked only when it has been actually received. Therefore, this has become what

is called as a �critical performance area’ of the banking sector as the level of NPAs affects the

profitability of a bank as shown in the figure below.

Figure 1 here

Therefore, an NPA account not only reduces profitability of banks by provisioning in the profit and

loss account, but their carrying cost is also increased which results in excess & avoidable management

attention. Apart from this, a high level of NPA also puts strain on a banks net worth because banks are

under pressure to maintain a desired level of Capital Adequacy and in the absence of comfortable

profit level, banks eventually look towards their internal financial strength to fulfill the norms thereby

slowly eroding the net worth.

Today the Net NPAs of Indian PSBs (which account for around three-fourths of the total assets of

Indian banking industry) are as low as 0.72 percent and gross NPAs are at 2.5 percent. However,

Nitsure (2007) contends that once there is a slowdown in private expenditure and corporate earnings

growth, companies on these banks’ books will not be in a position to service their debts on time and

there is a strong likelihood of generation of new NPAs. Moreover, he also suggests that with rising

interest rates in the government bond market, the banks’ treasury incomes have declined considerably.

So banks will not have enough profits to make provisions for NPAs.

Under these circumstances, management of NPAs is a difficult task. Therefore, my study focused on

the problem of NPAs being faced by the public sector banks and it’s management with a reference to

the state of Jharkhand.

Jharkhand was incarnated in August 2000 by the bifurcation of Bihar. The geology of Jharkhand puts

it in the richest states category in terms of mineral and ore deposits. Though industry-wise it is not a

developed state yet, still it houses some of the best names in industry namely Tata Steel, HINDALCO

of the AV Birla Group, BOC Gases, Uranium Corporation, SAIL, Heavy Engineering Corporation,

Metallurgical Consultancy etc. Over a period of six years or so, there has been a spurt in credit

demand in all the sector like industry (mostly SMEs), personal, agriculture and other Small Scale

Industries. With an objective of overall development of the state, the government of Jharkhand

pursued the banks to increase their lending to various quarters. The banks therefore resorted to

indiscriminate lending and as a result the amount of bad loans in Jharkhand stood at around Rs 4500

Cr as on 30-09-2006. The study finds the reasons and solution