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The Monk Who Sold His Ferrari

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Submitted to Prepared By

Mr. D.K Gupta Anoop Guleria

Anshuman G. Sahoo

Aradhana Shrivastava

Bhargav Bhuyan

Deepak Kumar Dinkar

Keertana A.

Table Of Content

1. Abstract

2. Introduction

3. Effect on NPA’s on Banking Operations

4. Reason behind increasing NPA’s

5. Effective ways to control NPA’s

6. Conclusion

7. References


In the liberalized economy, Banking and Financial sector get high priority. The banks in India are facing the problem of Non-Performing Assets (NPAs). The earning capacity and profitability of the banks are highly affected because of the existence of NPAs. The Indian banking system has undergone significant transformation following financial sector reforms. It is adopting international best practices with a vision to strengthen the banking sector. Several prudential and provisioning norms have been introduced, and these are pressurizing banks to improve efficiency and trim down NPAs to improve the financial health in the banking system. In the background of these developments, this study strives to examine the state of affair of the Non performing Assets (NPAs) of the public sector banks and private sector banks in India with special reference to weaker sections. The wealth, health & financial status of the industry and trade are the reflection of Non Performing Assets in Indian Banks. The accumulating NPA exposes the banks to the credit risk, arising due to the failure of non recovery of loans from the borrowers. The magnitude of NPA is comparatively higher in public sectors banks than private sector banks. To improve the efficiency and profitability of banks the NPA need to be reduced and controlled.


An asset is classified as a non-performing asset (NPA) if the dues in the form of principal and interest are not paid by the borrower for a period of 180 days. However with effect from March 2004, default status would be given to a borrower if the dues are not paid for a period of 90 days. In case of any advance or credit facility that is granted by the bank to the borrower becomes non-performing, then the bank will have to treat all the advances/credit facilities that have been granted to that borrower as non-performing without having any regard to the fact that there might be certain advances / credit facilities that have performing status.

The NPA level of our banks is way high than the international standards. One important factor that contributes to the above is the writing off bad loans by banks. Indian banks should take care that they give loans to credit worthy customers

The strategy has to be decided keeping in view the regulatory norms, business environment, market share, the risk profile, available resources etc. It should be reflected in Board approved policies and procedures to monitor implementation. The essential components of NPA management are

i) quick identification,

ii) NPA containment at a minimum level,

iii) Steps to ensure minimum impact of NPAs on the financials.

The RBI has issued the guidelines to banks for classification of assets in to following categories.

1. Standard Assets:

The asset that does not disclose any problem and carries risk less than normal risk to the business is classified as standard asset.

2. Sub Standard asset:

An asset that is non-performing for a period not exceeding 12 months is called as sub standard asset.. The account holder comes in this category when they don’t pay three installment continuously after 90 days and up to a maximum of 1 year.

3. Doubtful NPA:

An asset that has remained NPA for a period exceeding 1 year is classified as doubtful NPA. It is further classified as:

• D1: up to 1 year: 20% provision is made by banks.

• D2: up to 2 year: 30% provision is made by banks.

• D3: up to 3 year: 100% provision made by banks.

Effect of NPA’s on Various Banking Operations.

We know that the bigger the size of balance sheet bigger can be the efficiency of the bank but it’s also depend a great deal on the returns that it gets on its assets. NPA’s results in non generation of interest income and also banks have to keep some part of their profits as provisions. NPA’s have very bad impact on the returns that we get on assets in the these ways-

1. The Capital adequacy ratio (CAR) of the bank is disturbed and hence the cost of the capital goes up.

2. It effects the EVA (economic value addition) by the banks to a great extent because EVA is difference between net operating profit and cost of capital, so because cost of capital increases EVA decreases.

3. Current profits of the banks also get eroded because there are doubtful debts which also needs writing off.

4. There is loss in the net interest income of the bank because it is accounted on receipt basis.

5. There is restriction on the cash flow of the bank because of the provisions of the fund made for NPA’s.

6. It also has bad effect on the Brand name and Goodwill of the bank.

Reasons behind increasing NPA’s.

There are institutional as well as infrastructure factors which are responsible



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