ANALYSIS OF NON-PERFORMING ASSETS OFNATIONALIZED AND PRIVATE
BANKSOrEffect of NPA on Financial Perforance of !oercial Ban"#
ofIn$ia %&' INTROD(!TIONFor anynation, bankingsystemplays
avital roleinthedevelopment of itssoundeconomy. Banking is an
important segment of the tertiary sector and acts as a back boneof
economic progress. Banks are supposed to be more directly and
positively related tothe performance of the economy. Banks act as a
development agency and are the sourceof hopeandaspirations of
themasses. Commercial banks arethemajor player todevelop the
economy. A major threat to banking sector is prevalence of
Non-erformingAssets !NAs". NAs reflect the performance of banks. A
high level of NAs suggestshigh probability of a large number of
credit defaults that affect the profitability and net-#orth of
banks and also erodes the value of the asset. $he NA gro#th
involves thenecessity of provisions, #hich reduces the overall
profits and shareholdersvalue !arul %hanna, &'(&". )n
present scenario NAs are at the core of financial problem of
thebanks. Concrete efforts have to be made to improve recovery
performance. $he
mainreasonsofincreasingNAsarethetarget-orientedapproach,
#hichdeterioratesthe*ualitative aspect of lending by banks and
#illful defaults, ineffective supervision ofloanaccounts,
lackoftechnical andmanagerial e+pertiseonthepart of
borro#ers!%amini ,ai, &'(&".A #ell-built banking sector is
significant for a prosperous economy. $he crash of thebanking
sector may have an unfavorable blo# on other sectors. A banker
shall be verycautiousinlending, becausebankerisnotlendingmoneyout
ofhiso#ncapital.Amajor portion of the money lent comes from the
deposits received from the public andgovernment share. At present
NA in the banking sector is debate topic because NA isincreasing
year by year particularly in nationali-ed banks $he .ross
Non-erformingAssets !.NAs" of Nationali-ed Banks as on /une
&'(& #ere ,s.01,'12 crore #hichamount to &.345 of .ross
Advances. )n this direction present paper is undertaken tostudy the
reasons for advances becoming NA in the )ndian Commercial banks
6ectorand to give suitable suggestion to overcome the mentioned
problem. Banking in )ndia originated in the first decade of the
(3th century. $he oldest bank ine+istence in)ndia is the 6tate
Bankof )ndia, #hichoriginatedfromthe BankofCalcutta in /une (2'7,
#hich almost immediately became the Bank of Bengal. $his #as(one of
the three presidencybanks, the other t#obeingthe Bankof Bombay
andthe Bankof8adras. $hethreebanksmergedin(3&(toformthe
)mperialBankof)ndia, #hich, upon )ndia9s independence, became the
6tate Bank of )ndia in (3::.$he ,eserve Bank of )ndia, )ndia9s
central banking authority, #as established in April(31:, but #as
nationali-ed on /anuary (, (343. )n (343, the Banking ,egulation
Act#as enacted #hich empo#ered the ,eserve Bank of )ndia !,B)" ;to
regulate, control,and inspect the banks in )ndia;. $he Banking
,egulation Act also provided that no ne#bank or branch of an
e+isting bank could be opened #ithout a license from the ,B), andno
t#o banks could have common directors.)ndira .andhi, then rime
8inister of )ndia, e+pressed the intention of the .overnmentof
)ndia in the annual conference of the All )ndia Congress 8eeting
ina paperentitled "Stray thoughts on Bank
Nationalization."$hereafter, the .overnment of )ndia issued an
ordinance and nationali-ed the (4 largestcommercial banks in /uly,
(373. $hese banks contained 2: percent of bank deposits inthe
country. )n (32', 7 more commercial banks #ere nationali-ed. )n the
early (33's, theNarasimha ,ao government embarked on a policyof
liberali-ation, licensing a small number of private banks. $his
move, along #ith therapid gro#th in the economy of )ndia,
revitali-ed the banking sector in )ndia, #hich hasseen rapid gro#th
#ith strong contribution from all the three sectors of banks,
namely,nationali-ed banks, private banks and foreign
banks.$herearevariousproblemsfor
efficiencyrunningthebanksoperation. Financial,econstruction",
6A,FA@6) Act!6ecuriti-ation>,econstruction of Financial assets
> @nforcement of 6ecurity interest Act, Aoan" etc.$o handle the
NAs, capital risk, market risk and operational risk a set of
agreementsset by the Basel Committee on Bank 6upervision !BCB6",
#hich providesrecommendations on banking regulations. $he purpose
of the accords is to ensure thatfinancial institutions haveenough
capitalonaccountto meet obligationsandabsorbune+pected losses.$he
Basel accords are a series of recommendations on banking la#s and
regulationsissued by the Basel Committee on Banking 6upervision
!B6B6". $he Basel committeeon Banking 6upervision provides a
forumfor regular cooperation on bankingsupervisory matters. )ts
objective is to enhance understanding of key supervisory
issuesandimprovethe*ualityofbankingsupervision#orld#ide.
Bithavie#tomovingto#ards international best
practicesandtoensuregreater transparency, it hasbeendecided to
adopt the C3' daysC overdue norm for identification of NA, from the
yearending 8arch 1(, &''4.Accordingly, #ith effect from 8arch
1(, &''4, NA shall be aloan or an advance #hereD )nterest
andEor installment of principal remain overdue for a period of more
than3' days in respect of a term loan, $he account remains Fout of
orderC for a period of more than 3' days, in respect ofan
