Page 219 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes Foreign banks operating in India do not seem to be as serious in sanctioning and monitoring
advances in the past as they are today. As a result, gross NPAs of these banks to their total
advances initially shot up from 4.3 percent in 1997 to 7.0 percent in 2000. But the same tended to
decline persistently to touch an all time low level of 1.8 percent in 2009.
Among bank groups, the new private sector banks have the lowest NPAs followed by foreign
banks in India, old private banks and public sector banks.

Self Assessment

Fill in the blanks:
11. As per the new norms if interest is not paid for ........................, the advance is classified as
NPA.
12. ........................ is the most important factor contributing to enormously high level of NPAs
in Indian commercial banks.
13. NPAs declined from ........................ in 1997 to ........................ in 2009.

13.6 Suggestions to contain NPAs of Commercial Bank in India

It is generally argued that in view of lower percentage of advances to GDP and lower economic
cost of bad loans as compared to those in Tiger economies, the impact of NPAs on the Indian
economy is not that alarming as witnessed recently in the East African Region, Japan or another
part of the globe, viz., Russia facing chaos. This should, however, not lull the bankers and the
RBI into sense of complacency because of growing competitiveness in the financial sector
consequent upon globalization of Indian economy.
The mere fact that even the reduced level of NPAs of the Indian banks is still higher as compared
to developed county standards of around 2 percent warrants continued remedial actions. As
such, strategic measures both at micro and macro levels—along the following lines have to be
taken to effectively contain the magnitude of NPAs in the loan portfolio of the banks.

The approach to NPA management by the banks has to be multi-pronged, necessitating varied
strategies suited to different stages of the passage of credit facility.
In order to reduce the level of NPAs in the loan portfolio, every commercial bank has to embark
upon strategic plan to prevent the occurrence of the NPAs and stoppage of health accounts into
bad loans. This calls for crystal clear policy guidelines in respect of credit appraisal and monitoring
on the one hand, streamlining credit assessment and supervision procedures and strengthening
and the appraisal and monitoring cell, on the other.

The existing credit evaluation process is not adequate and focused and the staffs handling the job
are not endowed with required skills and expertise. It is, therefore, imperative to bring about
radical change in credit evaluation process to ensure any in-depth appraisal focussed on risks
inherent in the proposal and to lead to a credit rating of the potential borrower. Based on
financial statements and their in-depth appraisal and physical checking of stocks the bank should
develop suitable model to assess health and repaying capacity of the credit applicants.
Serious attention needs to be paid to monitoring of the loans sanctioned by the bank. Since most
bad loans have been due to poor credit monitoring than to poor credit appraisal, comprehensive
preventive monitoring mechanism to maintain sound and health loan portfolio has to be
developed. This mechanism has to lay emphasis on early detection of all signals relating to the
health of the borrower, perspicacious analysis of those signals to take a view on the borrower’s
business and fast initiation of action upon warning signals to contain damage. Based on the

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