Page 45 - BANKING FINANCE JULY 2016

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doubtful and loss asset categories, the provisioning require- Y Bank shareholders are adversely affected
ments remained at 10%, 20-50% (depending on the dura-
tion for which the asset has remained doubtful), and 100%, Y Bad loans imply redirecting of funds from good projects
respectively, the recognition norms for NPAs have also been to bad ones. Hence, the economy suffers due to loss of
tightened gradually. Since March 1995, loans with interest good projects and failure of investments.
and/or instalment of principal overdue for more than 180
days are classified as non-performing. Y When bank do not get loan repayment or interest pay-
ments, liquidity problems will erupt.
This period shortened to 90 days from the year ending 31st
March 2004. Provisioning norms further strengthened with Y They limit recycling of funds and set in asset-liability
15% general provision for sub-standard secured assets and mismatches.
additional 10 % for unsecured portion .Doubtful unsecured
portion 100 % and secured portion 25%\40%\100% as per Concerns of NPA at the quarter end De-
tenure of doubtful up to 1 year or 1-3 years or more than cember 2015
3 years respectively and Loss assets 100% provision.
Mounting bad loans on the books of Indian banks, especially
NPAs cost to banks and national state-run lenders, is a major concern of the Reserve Bank
economy: of India (RBI) and the policymakers at government. At last
count (as on 31 December 2015), the total gross non-per-
One of the major problems that hamper the possible finan- forming assets (GNPAs) of 26 public sector banks have to-
cial performance of the Public Sector Banks is the increas- taled to Rs 4,04,667 crore .Banks also have significant por-
ing non performing assets. tion of restructured loans on their balance sheets (some-
what equal to the NPA amount), which also faces the risk
The non performing assets impact drastically the working of slipping to bad loan category if the economy doesn't pick
of the banks. up as expected.

The efficiency of a bank is not always reflected only by the The total stressed assets in the Indian banking industry
size of its balance sheet but also by the level of return on would be around Rs 8 lakh crore or 11.30 per cent of the
its assets. NPAs do not generate interest income for the total loans given by Indian banks. The RBI has set March,
banks, but at the same time banks are required to make 2017 as deadline for banks to clean up their books. From
provisions for such NPAs from their current profits. Rs 53,917 crore, GNPAs in September 2008 (just before the
2008 global financial crisis broke out following the collapse
NPAs have a deleterious effect on the return on assets in of Lehman Brothers), the bad loans of Indian Banks have
several ways - now grown to Rs 4,04,667 crore in December, 2015.
They erode current profits through provisioning require-

ments.

They result in reduced interest income.
They require higher provisioning requirements affect-

ing profits and accretion to capital funds. They affect
the capacity to increase good quality risk assets in fu-
ture.

NPAs do not just reflect badly on a bank's books of account,
they adversely impact the national economy. Following are
some of the repercussions of NPAs:
Y Depositors do not get rightful returns and many times

may lose uninsured deposits. Banks may begin charg-
ing higher interest rates on some products to compen-
sate Non-performing loan losses

BANKING FINANCE | JULY | 2016 | 45

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