Page 205 - DMGT303_BANKING_AND_INSURANCE

Banking and Insurance

Notes (ii) Where the outstanding balance in the principal operating account is less than the
sanctioned limit/drawing power, but there are no credits (to this account)
continuously for six months as on the date of balance sheet or credits (to this account)
are not enough to cover the interest debited during the same period.
2. 'Overdue': Any amount due to the bank under any credit facility is 'overdue' if:

(i) It is not paid on the due date fixed by the bank.

Notes In order to move towards international best practices and to ensure greater
transparency, it has been decided to adopt the '90 days overdue' norm for identification of
NPAs, from the year ending March 31, 2004.

10.3 Reasons for NPAs

Various studies have been conducted to analyse the reasons for NPA. The reasons may be
widely grouped in two heads:
1. Over hang component (external)
2. Incremental component (internal)
Over hang component (portion) of NPA is due to environment reasons or business cycles etc.
Incremental component (portion) may be due to internal bank management, credit policy,
terms of credit etc. Some of the reasons can be detected and removed but some cannot as in the
case of external causes. One has to wait for conditions to be positive. One thing is widely
accepted that NPAs cannot altogether be eliminated.

10.4 Major factors contributing to high level of NPAs in India

1. Inadequate legal framework for collecting overdue loans.

2. Although loans are backed by additional/collateral security(s) but in practice, the value of
the collateral security may not be matching (i.e. less) with the loans.
3. More importantly, timely execution of collateral is not done or is difficult.

4. Limited write-offs of NPAs by the public sector banks. As a consequence, NPAs tend to be
carried in the account books and provisions against them are built up slowly.

10.5 Solution of NPA Problem in Indian Banks

The Indian financial sector has undergone significant transformation during the decades of
financial liberalization.
Banking sector reforms, introduced in 1992-93, have been based on five fundamentals:

1. Strengthening of prudential norms and market discipline
2. Appropriate adoption of international benchmarks
3. Management of organizational change and consolidation
4. Technological up gradation

5. Human resource development

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