Page 207 - DMGT303_BANKING_AND_INSURANCE

Banking and Insurance

Notes 4. Preventing Slippage of NPAs Accounts: The Reserve Bank has recently issued guidelines
on preventing slippage of NPAs accounts whereby banks are advised to introduce a new
asset category: 'special mention accounts', in between 'standard' and 'substandard'
categories for their internal monitoring and follow up. This enables banks to:
(i) Look at accounts with potential problems in a focused manner right from the onset
of the problem.
(ii) Increase efficacy of monitoring
(iii) Ensure Quicker remedial actions.

5. Narasimham Committee and The Verma Committee Recommendations: The Narasimham
committee and the Verma committee looked into the problems of weak banks and made
certain recommendations, which were considered by government and the Reserve bank
in resolving NPA problem.
6. Legal reforms: The absence of quick and efficient system of legal redressal constitutes an
important "moral hazard" in the financial sector as it encourages irresponsible borrowing.
The problem of NPAs can also be tackled by suitable legal reforms. The problems in
regard to legal system are:
(i) Substantial delays in arriving at a legal solution of disputes
(ii) Need of proper legal framework to ensure expeditious recovery of debt

(iii) Need for adequate powers to banks to effect property transfers
(iv) Need of more debt recovery tribunals and setting up of settlement Advisory
Committees in banks.

7. Banks need to strengthen their internal control and risk management systems: Leaving
aside the problem of weak banks, in profitable banks also, the NPA levels are still high.
The resolution of the NPA problem would require:
(i) A vigorous effort by banks to strengthen their internal control and risk management
systems

(ii) Setting up early warning signals for timely detection and action.
(iii) Greater accountability on the part of corporate in terms of greater disclosures in the
case of defaults

(iv) An efficient credit information system
(v) Stricter accounting and prudential standards.
The above steps can help effectively contain NPAs in future, if meticulously implemented.
The level of non-performing assets (NPAs) of the banking system in India has shown a decline
in recent years, but it is still too high. Part of the problem in resolving this issue is the carry-over
of old NPAs in certain declining sectors of industry. The problem has been further complicated
by the fact that there are a few banks, which are fundamentally weak and where the potential for
return to profitability, without substantial restructuring, is doubtful.

!
Caution The Reserve Bank has recently issued guidelines on preventing slippage of NPAs
accounts whereby banks are advised to introduce a new asset category: 'special mention
accounts', in between 'standard' and 'substandard' categories for their internal monitoring
and follow up.

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