Impact of Increase In Non-Performing Assets In Bank– Comparative Analysis of Public Sector And Private Sector Banks In India

INTRODUCTION

The banking system plays a vital role in the finance sector. Without the sound and efficient system of the bank will lead to a healthy economy. The Narasimhan committee introduced the concept of non- performing assets. And it is the best way for judging the status of the bank. The burden will lie on the bank for the non-payment of loans. When the loans are not repaid there will be a huge loss to the bank and there will be money to transact between the customers. It is a risk arising from the customers to the bank. The bank needs to bear all the risks. Nowadays non-performing asset is kept on increasing in both public sector banks and private sector banks. They face ultimate survival in the market. As compared to public sector-private sector banks have less non-performing assets, and their net worth is slightly increasing. NPA hurts funds over banks in capital markets. The government of India propounds many policy and rules to decrease and control over non-performing assets. Non-performing assets are the only reasons to fall on revenue. The object of this comparison between the private sector banks and public sector banks is to outcast the impact between them and the reasons behind the banks on non-performing assets. And to suggest the way to reduce the non-performing assets. And also causes for the increase in non-performing assets.

CAUSES FOR RISING NON-PERFORMING ASSETS IN INDIA

The banking sector is the pillar for the economy. Through the banking sector, only the country can check the accountability which likely to cause hinder of the economy. To reduce the non-performing assets bank must work efficiently and must have the reasons to forecast the reasons to cause the non-performing assets on bad loans. The problems for rising of non-performing divided into three categories, first Is on the initial performance of internal banking, second the causes arise from the accountability of borrowers were on the borrowers tend to consider as the main cause for the rise of NPA, third other causes which happens outside the circumstances of the banking system.

• CAUSES RESPONSIBLE TO BANKS

The Reserve bank of India has said that poor credit appraisal skills to lenders have resulted in a high level of stress over resulting in bad loans over the last five years. One of the major hinders the non-performing assets management of bank which is inadequate credit appraisal capacities were the banks that know the only consulting firm and a few other desks in the selective bank (1). A loan may be bad because of the selection of wrong borrowers. The lender may not have the full and true disclose material facts about the borrower since the data which is not systematically distributed by the financial system. That’s why the potential borrower has more information than other to exploit the lender with less information. The borrowers tend to give misleading information to the lender which make even worse to take a decision by the lender. So, the challenge faced by the bank is on choosing the right borrower. In that situation, the bank needs to reject the wrong borrower through better investigation. At the same time, honest borrowers must be distinguished from the wrong borrowers. Such borrower engages in high risk of activities which turn the loan into default loan causing problems to the bank (2). Moreover, the management does not have enough capacity on its lending facilities.

• CAUSES RESPONSIBLE TO BORROWER

Longer gestation time is held between the transaction with the bank, were the bank according to its transaction the importance is not equally distributed and hence there is a lack of management in banks over borrowers. Apart from that the diversion of funds to unrelated business or fraud lapses in initial borrowers due to the due diligence and inefficiencies in the monitoring process for the reasons of bad loans in the bank (3). And there is an inadequate research and development over the borrower.

• OTHER CAUSES

Political warfare comes to the picture were in the present mode government that which made a discussion in parliament that non-performing assets have gone up to 10lakh crore Indian rupee till March 2018 and its now 12lakh crore Indian rupee. About 9.57 lakh crore non-performing were on Modi government. Through many criticisms made by politician and activists over the government that put the bank in the insecure situation. And many parliamentary debates were going to reduce and regulations to control the non-performing assets (4). The RBI direction on referring companies to the national company law tribunal could push the non-performing assets to clean up the process to end its game, this process has been already initiated for few cases. An estimated more than 70%of cases to be restructured in upcoming periods (5).

IMPACT OF NPA ON BANKS

• LIQUIDITY POSITION

If the bank evaluates less capital the future business concern, which affects the position of banks and creating a mismatch between the assets and liability and they force the bank to raise the resources at a high rate. So, there will be an impact on the profitability of banks, were they not able to recover the amount from the borrower the level of profits will come down.

• UNDERMINE BANK’S IMAGE

Increase in non-performing assets which shadows the domestic markets and global level markets, on that situation the bank profitability decreases which lead to the bad image to banks.

• EFFECT ON FUNDING

Increase in non-performing assets leads to scarcity in funding to other borrowers. As well as the Indian capital market also get affected. And then there will be only a few banking institutions lend money.

• HIGHER COST OF CAPITAL

It shall result in increasing the cost of capital as banks will now have to keep aside more funds for smooth operations.

• HIGH RISK

High on non-performing assets, low profitability, high risk in business and work against the bank and may take the two circumstances survival of the bank. And it affects the risk-bearing capacity of the bank.

• BANK PROFITABILITY

The which makes low profits have lower capital adequacy ratio and the low capital ratio which limits the further creation of assets. Such kind of banks face difficulties in their growth, expansion, and plans and there they need not wherewithal to march boldly on these fronts. In these growth failures in the expansion, the only consequences and stagnation and negative growth.

• They reduce net interest income as they do not charge the interest to these accounts.
• Servicing non-performing assets need to be prudentially provided for. This will again lead to reduced profitability.

SUGGESTIONS TO NPA IN BANKS

• Debt recovery tribunals: According to Narasimhan committee report (1991) suggested setting up tribunals to reduce set up for cases. There are only 22 debt recovery tribunals and debt recovery appellate tribunals not sufficient to solve problems. So, setting up more tribunals will the solution to reduce the problems of NPA to banks.
• Securitization Act 2002: Securitization and reconstruction Act 2002. In this act enables the bank to issue notice for defaulters for the recovery of money within 60 days. The notice contains that the property will not sell or dispose of without the consent of the lender. The securitization Act empowers more powers to the bank to take over the possession of the assets of the management of the company. The lenders can recover the property after the debt amount is recovered by the bank and the property can be discharged by the lender. And enables to acquire the non-performing According to the provisions of the Act, Asset Reconstruction Company of India Ltd. with eight shareholders and an initial capital of Rs. 10 crores have been set up. The eight shareholders are HDFC, HDFC Bank, IDBI, IDBI Bank, SBI, ICICI, Federal Bank and South Indian Bank (6).
• Lok Adalats: lok adalats is the best way to recover the loans. According to the RBI guidelines issues in 2001 were they cover up NPA about 5laks rupees, the suit filed and non-filed will be covered.
• Compromise settlements: It is the simplest way to recover non-performing assets. The compromise settlements scheme will applicable advances under 10crore rupees. It covers the cases which are filed and pending in debt tribunal tribunals and debt recovery appellate tribunal. Cases which obtained by fraud and wilful distress will be excluded.
• Credit information bureau: the information is necessary to prevent turning from loans to non-performing assets. If there is a defaulter in one bank and the information about the defaulter should be delivered to all banks. So, that the bad loans can be set aside. The credit information bureau can help to maintain the record which can be assessed by other financial institutions.
• Corporate governance: A consultative group has been set up by Dr. A.S. Ganguly by the reserve bank to review all the banks and financial institution and obtain compliance, transparency, and records and making regarding recommendations for the board of directors with a view to minimizing the risks. The group is now finalizing the guidelines and supervise the effective control on boards over non-performing assets.

COMPARATIVE ANALYSIS OF PVB AND PSB OF NPA

In the year 2013, the gross NPA was Rs.2,52,275 crore and there is an increase from the year 2014. precisely after one-year September 2014, the NPA went to Rs. 2,78,458 crores. Moving to the year 2016 March were there is an immense growth of NPA went Rs. 5,95,636 crores. After that certain percentage decline in the year of 2017 march went down from the previous year December 2016 from Rs.7,32,976 crores to Rs.7,11,436 crores.at the end of the financial year, March 2018 went 16 percent higher than December 2017 to Rs.8,86,460 crores about 10,25,229 crores (7). In the month of June 2018went certain percentage down to Rs.10,03,404 crores.

In the year 2013, the public sector bank gross NPA was Rs.2,28,244 crores. At the end of December, 2014 certain percentage of NPA went up to Rs.2,72,706 crores. Moving to March 2016 the amount increases from the previous year to Rs.5,39,955 crores. From the year 2016 December to June 2017 there is a slight gradual increase and decrease through in gross in the public sector banks. At the end of March 2018, the gross NPA touched above Rs. 9,00,000 crores (8). From the beginning of the fourth quarter, the gross NPA went down to Rs.8,74,071 crores from Rs.9,00,000 crores.

In the year of 2013 December, the private bank gross NPA went up to Rs.24,031 crores. At the end of financial year March 2016, the gross of private bank NPA keeps on increasing from the past financial year 2014-2015. In the month of September 2016, the gross NPA rated about Rs.75,492 crores. The major loss for private banks is recorded in the year 2018march the gross went up to Rs.1,28,627 crores. While 18 private sector banks surged by Rs.19,446 crores or 17.9percent to 1.28lakh crore in the March 2018 (9).

The state bank of India plays the higher position in public sector bank with higher gross NPA in Rs.2,12,840 crores. After the Nirav Modi scam hit the Punjab national bank (PNB), which increases to the maximum non-performing assets in recent times compared to the previous year for PNB. The leading industry bank IDBI hit among the other public sector banks. Oriental bank of commerce and a bank of India has declined in recent times about Rs.1,920 crores in March and an oriental bank of India was down by Rs.1,417 crores (10).

The industry leading bank ICICI bank makes the top at the list Rs.53,465 crores, axis bank widened by Rs.9,428crore or 37percent in the March 2018 to Rs.34,249 crores. The federal bank and yes bank sail on the same ratio of gross NPA about Rs.2869 crores and Rs.2824 crores. At last on the graph south Indian bank takes a least gross percent of non-performing assets among other private sector banks on gross bad loans by Rs.2,552 crores (11).

CONCLUSION

The increase of non-performing assets is always a problem to the banks and it has a direct impact on the profitability of banks. The bank and government must take steps to effect the process of recovery from bad loans and other problems related to bad loans. This paper reflects about the causes and impact of non-performing assets, and this article picturizes the comparative analysis between private sector banks and public sector banks with regard to gross NPA. The banks and government must adopt a various adequate policy to reduce the NPA. The banks must take precautionary measures before the borrower obtain a loan, which the borrower can affect to create a bad loan to banks. The author concludes by the suggestion to reduce NPA and formal methods to control the NPA. The bank must provide loans to those who have better creditworthiness so if then only the bad loans can prevent.

BIBLIOGRAPHY

1. https://economictimes.indiatimes.com/industry/banking/finance/banking/high-bad-loans-due-to-poor-credit-appraisal-skills-of-banks-rbi/articleshow/48974290.cmss

2. https://thefinancialexpress.com.bd/views/role-of-selection-of-borrowers-in-bad-loan-creation-1520698901

3. bank https://www.thehindubusinessline.com/money-and-banking/bad-loans-mainly-due-to-diversion-of-funds-says-ey-report/article7629867.ece

4. https://www.news18.com/news/politics/bad-loans-rose-rs-9-17-lakh-crore-under-modi-says-congress-after-raghuram-rajan-blames-upa-for-mess-1874589.html

5. https://indianexpress.com/article/business/banking-and-finance/non-performing-assets-actions-by-rbi-government-to-mitigate-bad-loans-by-2019-4760298/

6. http://www.ijsrp.org/research-paper-0714/ijsrp-p3145.pdf

7. https://infogram.com/bank-gross-npas-1h8j4x73gkxp6mv

8. https://infogram.com/psbs-gross-npas-1hxj48nmeprd4vg

9. https://www.firstpost.com/business/banks-bad-loans-pile-crosses-rs-10-lakh-crore-up-rs-1-39-lakh-crore-in-march-quarter-the-npa-mess-explained-in-7-charts-4496431.html

10. https://www.firstpost.com/business/banks-bad-loans-pile-crosses-rs-10-lakh-crore-up-rs-1-39-lakh-crore-in-march-quarter-the-npa-mess-explained-in-7-charts-4496431.html

11. https://www.firstpost.com/business/banks-bad-loans-pile-crosses-rs-10-lakh-crore-up-rs-1-39-lakh-crore-in-march-quarter-the-npa-mess-explained-in-7-charts-4496431.html

Author Rishikesh.R is pursuing B.Com.,LLB (HONS) Graduation at SASTRA Deemed to be University – Thanjavur (currently in 7th semester).