Page 215 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes than six months and the borrower has already gone ahead with implementing his projected
plan, the account becomes irregular for more than six months even if higher credit assistance
deserved on merits.
There has been large number of cases of camouflaging irregularities by routinely rescheduling
repayment or granting ad hoc facilities so as to avoid slippage of loans accounts into NPAs.
Since this practice of ever greening cannot be continued indefinitely, loan accounts partook the
character of NPAs.
Weak credit appraisal, non-compliance to lending norms and wilful default as also ineffective
credit monitoring and follow-up mechanism of the commercial banks have also contributed to
slippage of standard loans into bad loans. In India, greater focus is made on enhanced recovery
of NPAs, which may be effective to contain NPAs in the short run, but very little efforts are made
to follow-up once the loan is sanctioned. No serious efforts are made to study loan portfolio on
multiple dimensions to monitor the aggregate exposure of the bank to industries, groups,
regions, rating, classes, etc. As a result, the bank lacks any direct which can be pursued at an
individual loan level. Further, collection machinery has been found lax in most of the banks in
India.
Diversion of funds mostly for expansion/diversification/modernization, and taking up new
projects and for helping/promoting associated concerns have been reported to be the single
most prominent reasons for high level of NPAs.

Caselet RBI asks Banks to Improve Management of Non-
performing Assets

he Reserve Bank on March 29, 2012 has asked banks to improve their ability to
manage stressed assets, but said there was nothing alarming about an unexpected
Trise in the non-performing assets (NPA) levels this fiscal. “Concerns (on NPA) are
there. Banks have to improve their ability to manage NPAs. We have told banks what is
their lacuna. They have to improve their information system. But we see that the situation
is not alarming. Though this is our concern. Hope banks will be able to manage them,”
deputy governor KC Chakrabarty told reporters on the sidelines of a function organised
by YES Bank. It can be noted that following the continued slowdown in economic activities
on the back of rising interest rate regime, banks, especially the state-run ones, have been
reporting higher NPAs in their books since the second quarter. The country’s largest
lender SBI had reported record gross NPAs in Q3 at ` 40,080 crore and saw an 87.5 per cent
spike in its provisioning. But private lenders are better off. The total NPAs in the system
are set to top 3 per cent of the total assets this fiscal, against a 2.3 per cent last fiscal at
` 98,000 crore. But what’s worrying the regulator is the an over 300 per cent spike in
corporate debt recast this fiscal, which has already touched ` 76,251, against ` 25054 crore
in the previous fiscal. This makes the overall CDR asset in the system to over ` 1.9 lakh
crore.
Source: http://profit.ndtv.com/news/corporates/article-rbi-asks-banks-to-improve-management-of-
non-performing-assets-300813
The wide prevalent practice among commercial banks in India of providing working capital
facility subject to annual renewal with or without enhancement has also been responsible for
persistently high level of NPAs. If an existing company, which was performing well in the past,
turns sick due to its inability to face competition or due to the changing economic and policy
environment or sometimes due to inefficient management, there is no scope for the bank to
withdraw the facility unless the promoters decide to close down the company to merge it with

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