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Unit 13: Non Performing Assets

(b) In respect of an asset identified as a loss asset, full provision at 100 per cent should be made Notes
if the expected salvage value of the security is negligible.

Task Go through the RBI provisions for NPA’s and recommend some suggestions which
you think should be made.

Self Assessment

Fill in the blanks:
8. In accordance with the prudential norms, provisions should be made on the non-performing
assets on the basis of ............................

9. The general provisioning necessity for all types of ‘standard advances’ shall be
............................
10. In case of a loss asset, full provision at ............................ per cent should be made if the
expected salvage value of the security is negligible.

13.5 Management of NPAs

Non-performing assets came into Indian financial systems consequent to introduction of
Prudential Accounting Norms. An era of taking profits (even unrealized) was changed to
providing for expected loss. Days of ‘counting the chickens before the eggs hatch’ came to an
end. However, non-performing loans did exist even before the introduction of present prudential
norms. According to the RBI study, the proportion of problem loans (sticky loans) of PSUs to
their gross advances stood at 17.91 percent as on March 31, 1989. This soared to 23.5 percent as on
March 31, 1994. Reasons for the high level of NPAs are given below:

13.5.1 Originating Factors

According to RBI study, dues to the banking sector are generally related to the performance of
the unit/industrial segment. In a few cases, the cause of NPA has been due to internal factors of
the banks such as weak appraisal or follow-up loans but more often than not, it is due to factors
such as management inefficiency of borrowed units, obsolescence, lack of demand, non-
availability of inputs, environmental factors, etc. Wherever the unit/segment is doing well the
credit relationship is generally maintained except in cases of wilful default/misappropriation/
diversion of funds. The problems to the unit/segment arising out of various internal/external
factors were felt to be originating point for NPAs in banks.

13.5.2 Internal Factors

Among the internal factors responsible for high level of NPAs in Indian commercial banks, the
most important ones have been project appraisal deficiencies regarding technical feasibility,
economic viability and project management deficiencies in regard to implementation, production,
labour, and marketing, financial and administrative matters.

The culture of Indian banking system in respect of permitting excess or irregular drawings to
some extent even during the processing stage has also contributed to poor quality of loans and
NPAs. Further, PSBs have had the culture of consuming longer time even more than a year in
appraising loan proposals. As per the new norms if interest is not paid for two quarters, the
advance is classified as NPA. If proposal for genuine enhancement remains pending for more

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