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Unit 13: Non Performing Assets

information pertaining to financial performance of the borrowers, industry scenario, competitive Notes
position and management charges, a bank can obtain invaluable information regarding the
health of the borrowers, and early warning signals regarding a borrowing party. The loan
review mechanism is to be adopted as a tool to bring about improvements in credit
administration. Banks should also adopt their own risk-rating systems to assess the risk of
lending. Sanctions above certain limits should be through a committee, which can assume the
status of an “Approval Grid”. Exchange of credit information among banks would be of immense
help to avoid possible NPAs.
While developing suitable policy guidelines, the focus has to be on measures to be taken at the
branch level so as to identify danger signals, to diagnose the maladies and to take corrective
steps in potential NPA accounts in consultation with the controlling authority. Development of
IT system at branch level to capture the danger signals followed by probe to ascertain the
reasons behind its occurrence and taking quick action will go a long way in staying off the
incipient sickness.
Whatever be the monitoring system developed by the bank, its thrust should be on prompt
action. Introducing a credit rating of borrowers on the basis of all the available relevant
information will be extremely useful. Rating index acts as a trigger for a hierarchy of
predetermined actions. At the early stages of account irregularity, credit officers should check
loan convenient maintenance but at the other end, when the company rating starts to slip, banks
should be willing to call in loans.
In order to improve quality of the existing loan portfolio and maintain it on sustaining basis, the
banks management should take a long-term view of each component in the portfolio and take
decisions to exclude or include some components with specific features. Taking early decisions
to reduce exposure to a sector or industry and making focussed marketing efforts to bring
specific type of customers in the portfolio will help the banks in keeping the portfolio in a
healthy state.

The banking system ought to be so geared that a defaulter at one place is recognized as a
defaulter by the system. The system will have to provide a mechanism to ensure that the
unscrupulous borrowers are unable to play on bank against the other.
There is also a need to bring about change in the approach of banks towards legal action which
is generally the last step. No sooner the account becomes bad, the bank should take immediate
action to recover the loan.
With a view to ensuring effective and personalized appraisal, monitoring speedy recovery of
dues and maintenance of robust portfolio, the existing structure needs to be revamped to make
lean, flat and responsive, equipped with employees possessing right kind of skills, experiences
and aptitudes. These employees with clearly defined responsibilities should be empowered in
its true sense to discharge their duties properly. Accountability of the employees with respect to
credit appraisal, monitoring of loan accounts and recovery of dues should be fixed and
communicated to them.
Banks should also conduct special audits on a continuous basis to foil attempts of borrowers
doctoring their accounts to show negative net worth and seek registration with BIFR so as to
avoid/delay legal action initiated/to be initiated against them by the bank.

In view of ineffective and tortuous legal and judicial system and vitiated socio-political and
ethical cultures, it would be in fitness of things to accord greater weightage to compromises as
method of settlement of overdue accounts lying in the courts of law. In fact, compromises enable
bankers to make better recoveries than those through court. The value of such amounts, if
adjusted by the method of time-value of money, the losses incurred from the date of possible

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