123 CHAPTER 4 CONCEPTUAL FRAMEWROK FOR NON PERFORMING ASSETS 4.1 The Non-Performing Assets A core set of financial stability indicators for banks are: (a) capital adequacy; (b) asset quality; (c) earnings and profitability: (d) liquidity; and (e) sensitivity to market, credit and operational risks. Asset quality indications are a combination of non-performing loans to total loans, non-performing loans net of provisions to capital, sectoral distribution of loans to total loans and large exposures of capital to single parties. NPAs typically are the advances from banks to borrowers who are unable to repay. The urgency for resolution of NPAs is well understood. It is generally felt that NPAs reduce the profitability of a bank, weaken its financial health and erode its solvency. Resolving NPLs enables banks to free-up capital and resources and put it to productive use, leading to the effective recycling of capital. Further, resolution of NPLs brings the underlying assets back to productive use with attendant gains. Thus, recycling of capital in the economy in a timely manner is the overarching objective of an NPA resolution framework. NPAs create problems for the banking sector's balance sheet on the asset side. And they have a negative impact on the income statement as a result of provisioning for loan losses. In the worst case scenario, a high level of NPLs in a banking system poses a systemic risk, inviting a panic run on deposits and sharply limiting financial intermediation, and subsequently investment and growth in the economy. In fact, a high ratio of non-performing loans to total outstanding loans is itself an indication of a banking crisis. In this way, NPAs can be at once the consequence and cause of a banking crisis. 157 157 Dash M.K. and Kabra G., “The Determinants of Non-Performing Assets in Indian Commercial Banks: an Econometric Study”, Middle Eastern Finance and Economics, Issue 7, 2010
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123
CHAPTER 4
CONCEPTUAL FRAMEWROK FOR NON
PERFORMING ASSETS
4.1 The Non-Performing Assets
A core set of financial stability indicators for banks are: (a) capital adequacy;
(b) asset quality; (c) earnings and profitability: (d) liquidity; and (e) sensitivity
to market, credit and operational risks. Asset quality indications are a
combination of non-performing loans to total loans, non-performing loans net of
provisions to capital, sectoral distribution of loans to total loans and large
exposures of capital to single parties.
NPAs typically are the advances from banks to borrowers who are unable to
repay. The urgency for resolution of NPAs is well understood. It is generally
felt that NPAs reduce the profitability of a bank, weaken its financial health and
erode its solvency. Resolving NPLs enables banks to free-up capital and
resources and put it to productive use, leading to the effective recycling of
capital. Further, resolution of NPLs brings the underlying assets back to
productive use with attendant gains. Thus, recycling of capital in the economy
in a timely manner is the overarching objective of an NPA resolution
framework.
NPAs create problems for the banking sector's balance sheet on the asset side.
And they have a negative impact on the income statement as a result of
provisioning for loan losses. In the worst case scenario, a high level of NPLs in
a banking system poses a systemic risk, inviting a panic run on deposits and
sharply limiting financial intermediation, and subsequently investment and
growth in the economy. In fact, a high ratio of non-performing loans to total
outstanding loans is itself an indication of a banking crisis. In this way, NPAs
can be at once the consequence and cause of a banking crisis.157
157
Dash M.K. and Kabra G., “The Determinants of Non-Performing Assets in Indian
Commercial Banks: an Econometric Study”, Middle Eastern Finance and Economics, Issue 7,
2010
124
4.2 Life Cycle of NPAs in Bank
Understanding of asset cycle will help in effective management of NPA. The
asset cycle shows how an asset moves to different positions depending upon the
recovery, security and risk associated with it. However, the recoveries the main
criterion for determination of its status in the asset cycle. The Bank gets cash,
fund by way of deposits from the depositors. On sanction of a loan the bank
converts its cash into a loan asset. At the beginning, every loan asset is
(supposed to be) a performing one; which generates income to the Bank. This
performing asset is known as Standard Asset, which does not carry any problem
other than normal business risk. When it shows symptoms of delay in recovery
of due amount and it will become NPA as on the coming balance sheet date
unless the symptom is rectified, it becomes a Potential NPA. The period of
remaining in Potential NPA may vary from one quarter to 4 quarters depending
upon the nature of the account. If the due amount is recovered before the next
balance sheet date, it remains in the performing zone; otherwise it crosses the
Laxman Rekha of NPA & slips into the non-performing zone as on the balance
sheet date. Then it is known as Substandard Asset. Unless the critical overdue
amount is recovered, it remains as Substandard Asset up to for a period of less
than or equal to twelve months with effect from March 31, 2005 and then it
becomes Doubtful Asset. It remains as Doubtful Asset so long it is not declared
as Loss Asset by the auditors, RBI inspectors. The Standard Asset, Potential
NPA and Substandard Asset may slip into Doubtful, Loss Asset when there is
substantial loss of security or it carries more than normal business risk. A Loss
Asset can be converted to Doubtful Asset, Substandard Asset, Potential NPA,
Standard Asset depending upon its age of NPA by addition of substantial
security, bringing under normal business risk and recovery of critical overdue
amount, A Doubtful Asset cannot be converted to Substandard Asset but to
Potential NPA, Standard Asset by recovery of critical past due, overdue
amount. Similarly, a Substandard Asset can be converted to Potential NPA,
Standard Asset by recovery of critical overdue amount.
In the normal process, the Standard Asset converts to Cash in an asset cycle by
recovery of due amounts as per the sanction. But Substandard Asset as well as
Doubtful Asset can convert into Cash by cash recovery, legal process, and
125
compromise. Similarly a Loss Asset can be converted into Cash or liquidated by
write-off, compromise, legal process, cash recovery. In case of write-off and
compromise the bank pays cash from its profit.
There are three main stages in the life cycle of NPA in a bank Identification of
stressed assets and NPAs, investigation by measurement and obtaining insight
and lastly, resolution through crisis management and revitalization of stressed
assets.158
4.3 Development of NPA in Indian Banking Sector
The origination of the NPAs in the Indian Banking can be classified into two
stages:
a) Pre-liberalization era; and
b) Post-liberalizing era
4.3.1 Pre-liberalization era: In the context of accretion to NPAs in the banking
system, the contributory factors during this period were mainly the following:
i. Down-swings in agricultural sectors triggered by monsoon vagaries, bringing
about all-round economic and demand recessions.
ii. Industrial Licensing: The scale of the economy in relation to international
standards was compromised, leading to high capital costs per unit of production.
This was often said to be offset by lower labour costs. However, in reality
labour productivity, coupled with application of automation, outweighed the
benefit from lower labour costs in the Indian context.
iii. Sector-wise reservation
Reservation of major sectors for investment by the Government of India in the
public sector structure in post-independence days became a necessity owing to
various reasons, among others, non-availability of private capital. In later years
many of these Public Sector Units (PSUs) (though they might have served their
socio- economic objectives) became commercially unviable in the absence of a
proper growth plan. When faced with burgeoning employee costs during their
lifecycle.
158
Siraj K.K., “A Study on the Performance of Non-Performing Assets (NPAs) of Indian
Banking During Post Millennium Period”, IJBTM,Vol.2, No.3, March, 2012
126
As a result, down-stream integration of SMEs with these PSUs led them to a
sticky situation with their bankers owing to a longer receivable cycle/non-
realization of receivables. In addition, reservation in some of these sectors led to
setting up of uneconomical facilities, and improper quality and product pricing
(price-quality matrix issues) despite subsidization by the Government of India.
iv. Controlled interest rate: In the controlled interest rate regime, banks were
not in a position to price the risk premium. This led to cross-subsidization
across the risk profile of the loan assets. Although additional collaterals were
taken for risky loan assets, in the absence of a conducive Legal system, the
banks were not in a position to realize value from these collaterals.
v. Tariff protection: In the absence of a long-term tariff policy, it was difficult
for the banking system to appraise project viability with any degree of certainty
during the loan pay-back period.
vi. Role of Developmental Financial Institutions (DFIs): The DFIs played a
predominant role in the growth financing during the pre-liberalization era. This
model became unsustainable as they started facing difficulties in raising funds.
In a way, the DFIs in India played the role of Venture Capital (VC) funding
without capturing the possible upside of the model. The success of DFIs can,
therefore, be compared only with VC funding. However, because of non-
availability of a favourable legal environment, coupled with various extraneous
factors, they are often discredited with the failures.
4.3.2 Post-liberalizing era
Indian macroeconomic policies were conservative till the early eighties. There
were efforts for liberalization in the form of de licensing of selected industries,
permitted changes in the form of de-licensing of selected industries, relaxation
of import duties among eighties. There was a mini-industrial boom in the early
part of the seventh five-year plan (1985-88). However, a growing fiscal deficit
triggered a macroeconomic crisis in 1991. With the commencement of reform
of the economy in 1991, banks were to follow the Basel Capital Accord.
Consequently, the Reserve Bank of India (RBI) issued the first set of
comprehensive guidelines for Income Recognition and Assets Classification
(IRAC) in April 1992. The central bank, with a cautious move, adopted a time-
127
based provisioning method and averted a near crisis situation by not imposing a
write-off of the entire loan asset impairment amount based on present value of
realizable cash flow upon recognition of NPA.159
During post-commencement of reforms, and against the back-drop of hyped-up
demand projections endorsed by several leading strategists, the Indian economy
once again experienced a quick capacity build-up during the mid-nineties. On
the face of a liquidity crisis, many of these projects had to borrow at abnormally
high rates of interest. However, towards the end of the decade, the mistake was
realized as those loan assets started showing signs of impairment. The volume
of NPAs in the system reached a peak level, requiring focused attention. Many
banks set up taskforces, special asset management groups, etc. to deal with the
situation in a focused manner by creating a type of bad bank within the bank.
By that time there was economic crisis triggered by the high level of NPAs in
the banking system.160
By the mid-nineties the banking industry became risk-averse towards corporate
lending activity. Many banks took a strong position in government securities.
Propelled by the growth in the retail sector, the banking sector registered a
decent credit growth during the subsequent period. In the late-nineties, during a
declining interest rate regime, the banking sector was sitting on a sizeable
capital gain. As such, in order to tackle the NPA stock problem, the banking
sector generally adopted a ‘provide and hold’ strategy. 161
As a result, net NPAs
in the system declined as a result of the setting up of a self-help mechanism,
namely Corporate Debt Restructuring (CDR).
As a result, two committees were set up in quick succession and reports were
submitted: one in April 1998 (Committee on Banking Sector Reform –
Narasimham Committee) and another in October 1999 (Restructuring of Weak
Public Sector Banks – Verma Committee. the SARFAESI Act, 2002 was
passed.
159
G.V.Bhavani Prasad, NPAs Reduction Strategies for Commercial Banks in India IJMBS Vol.
1, Issue 3, September 2011 160
Indira Rajaramanan, GairamVasishtha – Non Performing Loans of PSU Banks some panel
results – Economic and Political Weekly – February 2002 161
Sardar N.S. Gujaral (2003), “Asset Quality and Management of NPA’s”, The Journal of
Indian Institute of Bankers”, Vol. -72, April-June, P-20.
128
4.4 Development of the NPA classification in Indian Banking Sector
Tandon Committee in 1975 recommended for classification of borrower’s
accounts into four categories as: Excellent, Good, Average and Satisfactory /bad
and doubtful accounts.
Pendharkar Committee was set up in 1981 which recommended the
classification of advances in different categories, to index the overall quality of
assets portfolio. It is the starting point for the introduction of the health coding
system of categorizing bank loan portfolio by the Reserve Bank of India in
1985.
Until mid-eighties, management of NPAs was left to the banks and auditors. In
1985, the first ever classification of assets for the Indian banking industry was
introduced on the recommendation of A.Gosh Committee on Final Accounts.
The mechanism was ‘Health Code System’ (HCS) involved classification of
bank advances into eight categories ranging from 1 (satisfactory) to 8 bad and
doubtful debts. 162
RBI introduced ‘Health Code’ system in 1980 for credit administration. Under
health code system, the bank loan assets were classified under eight categories
such as-
H C – 1 Satisfactory
H C – 2 Irregular
H C – 3Sick but Viable
H C – 4 Sick but Non – Viable
H C – 5 Recalled
H C – 6 Suit –filed
H C – 7 Decreed
HC-8 Bad and doubtful
The mechanism was introduced for classification of the accounts as per the
health code in the following manner.
162
Two decades of Credit Management in Indian Banks: looking back and moving ahead Dr. K.
C. Chakraborty Nov, 2013.
129
(a) Satisfactory: The account in which all terms and conditions are complying
with and safety of advances are not in doubt.
(b) Irregular: The account where safety of advances is not suspected, though
there may be occasional irregularities.
(c) Sick – viable: Advances to units which are sick but viable under nursing or
revival programs are under taken.
(d) Sick – non – viable / sticky: Advances where irregularities continue to
persist and there are no immediate prospects of regularization.
(e) Advances – recalled: Advances where the recalled repayment is highly
doubtful and nursing is not considered worthwhile, includes accounts where
decision has been taken to recall the advances.
(f) Suit – file – accounts: Accounts where legal action or recovery proceedings
have been initiated.
(g) Decreed debts: Accounts for which decrees have been obtained.
(h) Bad and doubtful accounts: The accounts in which the recoverability is in
doubtful due to shortfall in the value of the securities and inability /
unwillingness of the borrower to repay the bank’s dues partly or wholly.163
With reference to the loans which were categorized under health code 5 to 8,
interest on accrual basis should not be charged and booked to profit and loss
account. However charging of interest and provisioning were left to be decided
by the bank management. The banks continued to book income by charging
interest on accrual basis even on those loan assets, which has shown symptoms
of loss. This was not a prudential business practice; as the banks paid tax and
dividend on these incomes, which were never realized.
These guidelines were subjective and did not reflect the true picture of the
banks health. The Reserve Bank, as an authority for bank supervision in India,
felt the need to introduce more objectivity in the assessment of the bad debts of
the banks and to standardize the relative accounting norms as per the
international standards for maintaining sound banking system in this country.
163
S.C.Mitra and R.P.Kataria An Exhaustive Commentary on The Securitisation and
Reconstruction of Financial Assets and Enforcements of Security Interest Act, 2002 P242.
130
Further, if a balance sheet is to reflect a bank’s actual financial health, a proper
system for recognition of income, classification of assets and provisioning for
bad debts on a prudential basis is necessary. The Committee on financial
system, popularly known as Narasimham committee, examined the above issue
in 1991 and made various recommendations.
The Reserve Bank of India accepted these recommendations with certain
modifications and laid down norms to be implemented in a phased manner over
a three year period commencing from 1st April, 1992.the introduction of the
Prudential Accounting Norms, which are essentially based on the concept of
Nonperforming Assets (NPA). In 1998 the Narasimham committee has
submitted its 2nd report for further tightening of the prudential accounting
norms. A retrospect of the events clearly indicates that the Indian banking sector
has come far away from the days of nationalization. The Narasimham
Committee and the Verma Committee laid the foundation for the reformation
and improvement of the Indian banking. At a macro level the reforms brought
structural changes in the financial sector and succeeded in easing external
constraints on its operation i.e. reduction in CRR and SLR reserves, capital
adequacy norms, restructuring and recapitulating banks and enhancing the
competitive element in the market through the entry of new banks. The reforms
also include increase in the number of banks due to the entry of new private and
foreign banks, increase in the transparency of the banks’ balance sheets through
the introduction of prudential norms and increase in the role of the market
forces due to the deregulated interest rates these have significantly affected the
operational environment of the Indian banking sector.
To encourage speedy recovery of Non-performing assets, the Narasimham
committee laid directions to introduce special tribunals which lead to the
creation of an Asset Reconstruction Fund for revival of weak banks and to
maintain macroeconomic stability and also RBI has introduced the Asset
Liability Management System.
The Verma Committee (1999)
The committee was given the mandate for the identification of Banks as weak
strong and potential weak based upon the parameters of financial performance.
131
These parameters include capital adequacy ratio, coverage ratio, return to assets,
net interest margin, operating profits to average working funds, cost to income,
and staff cost to net interest income plus other income. Accordingly, UCO
Bank, United Bank of India and Indian Bank were identified as weak banks in
whose case none of the seven parameters were met. As against this, Oriented
Bank of commerce and State Bank of Patiala were identified as strong banks
because they satisfied all the parameters. But in respect of six banks, viz.
Allahabad Bank, Central Bank of India, Indian Overseas Bank, Punjab and Sind
Bank, Union Bank of India and Vijaya Bank, most of the parameters i.e. five or
six of the total seven parameters were not fulfilled. Hence, they were described
as potential weak banks.
4.5 Major Policy Initiatives pertaining to Non-Performing Assets
PERIOD DEVELOPMENTS
1992-93
(i) In order to reflect actual financial health of banks, the RBI
instructed the commercial banks to treat an amount in respect of term
loans, overdrafts and cash credit accounts. Bills purchased and
discounted and other accounts as 'past due' when not paid on the due
date (since revised to 30 days beyond the due date),
(ii) Banks were instructed not to charge and take into income
account, interest on all NPAs. An NPA is defined as a credit facility
in respect of which interest has remained' past due' for a period of
four quarters ending March 31, 1993, three quarters ending March
31, 1994, two quarters ending March 31, 1995 and onwards.
(iii) Banks were required for classification of assets as per the
prudential guidelines as were introduced based on the global
practices.
(iv) From a practical viewpoint, aggregate provisioning in respect of
amounts less than Rs 25,(00 to the extent of 2.5 per cent of the total
outstanding was to be made rather than a case by case evaluation of a
very large number of small accounts.
(v) Provisioning of NPAs was stipulated at 3() per cent of the total
provisions on substandard assets, doubtful assets and advances with
132
balance less than Rs 25000 for loss assets, the entire amount as to be
provided for by March 1993.
1993-94
(i) Banks were requested to Make full stipulated provision against
NPAs identified during 1993-94 besides the carried forward
provisioning for 1992-93.
(ii) In respect of advances with balances less than Rs 25.000, the
required provision for the year end March 3. 1 I 994 was enhanced
from 2.5 per cent to 5 per cent without reckoning the DICGC/ELGC
cover.
1994-95
(i) The provisioning requirement of NPAs with balances of less than
Rs 25,000 was increased from 5 per cent of the aggregate amount
outstanding to 7.5 per cent for the year ending March 31, 1995 and
further to 10 per cent for the year ending March 31, 1996
1995-96
(i) Banks were advised on April 31. 1995 that interest accrued and
credited to income account during the year ended March 1994 in
respect of accounts identified as NPAs for the first time during the
year ended March 31. 1995 should be reversed or pro\vided for as on
that date.
(ii) Banks were advised that provision need not be made for a period,
of one year from the date of disbursement in respect of additional
facilities sanctioned under the rehabilitation' package as approved by
BIFR term lending institutions.
1996-97
(i) On December 24, 1996 banks were granted an extension of one
year. i e, up to March 31, 1998 to complete the excercise of
classifying accounts with outstanding of less than Rs 25.000 into the
four asset categories. Pending such classification, a provision of 15
per cent of the aggregate amount outstanding was stipulated for such
advances for the year 1996-97 from 10 per cent for the year ended
March 31. 1996.
(ii) On January 29. 1997, regarding classification of NPA, it was
clarified as under:
(a) An advance account should not be classified as NPA based
133
merely on temporary deficiencies such as non-availability of
adequate drawing power, balance outstanding exceeding the limit,
non-submission of stock statement, the non-renewal of the banks on
the due date. etc.;
(b) If accounts of the borrowers have been regularised before the
balance sheet date by repayments of overdue amounts from genuine
sources, such accounts need not be treated as NPA even if the
interest/installments of principal remainedpast due for any two
quarters of the year. Accounts with potential threats of recovery
should.be straightaway classified as doubtful asset or loss asset, as
appropriate, irrespective of the period for which they remained as
NPA; and
(c) In respect of consortium advances, each bank was allowed to
classify the borrowal accounts according to its record of recovery and
factors having a bearing on the recoverability of the advances, as in
the case of multiple banking arrangements.
1997-98
(i) On April 9, 1997 banks were advised that advances granted for
agricultural purposes where interest/installment remained in arrear of
or more than two quarters (as against two seasons of harvest or two
half-years earlier) it should be treated as NPA from the accounting
year 1'997-98.
(ii) Banks were advised to make the following additional disclosures
in the 'Notes on Account' to the balance sheet for the year ended
March 31, 1997
(a) Percentage of net NPAs to net advances.
(b) the amounts of provisions made towards NPAs was reversed in
April 1997 when RBI advised the banks to reduce the interest
overdue period of two half-years in the case of agricultural advances,
to two quarters, i e, fi-om 12 months to six months, from 1997-98
onwards.
134
4. 6 Meaning and Concept of Non-Performing Assets
Regulators in different countries define NPAs differently. However, the broad
definitions include advances that show signs of weakness and impairment.
NPAs are those loans given by a bank or financial institution where the
borrower defaults or delays on interest or principal repayment.
An asset, which ceases to generate income for the bank, is called an NPA. The
factor used to determine whether an asset is an NPA or not is the record of
recovery and not the availability of security.' Securitization of non-performing
assets is used as a tool by banks and financial institutions to convert their
liabilities to investments, as once the assets are transferred they go off the
balance sheet of the banks and the security receipts issued for such transfers are
considered an investment.
Statutory Definition of NPAs
A non-performing asset is an asset or account of a borrower, which has been
classified by a bank or financial institution as substandard, doubtful or loss
asset.164
An NPA is an asset for which:
Interest or principal (or installment) is overdue for a period of 180 days or more
from the date of acquisition or the due date as per contract between the
borrower and the originator, whichever is later;
Interest or principal (or installment) is overdue for a period of 180 days or more
from the date fixed for receipt thereof in the plan formulated for realization of
the assets;
• Interest or principal (or installment) is overdue on expiry of the planning
period, where no plan is formulated for realization of the assets; and
• Any other receivable, if it is overdue for a period of 180 days or more on the
books of the Securitization Company or ARC.
164
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 ("SARFAESI Act") in Section 2(1) (o)
135
However, the board of directors of an SC or ARC may, on default by the
borrower, classify an asset as an NPA even earlier than the period mentioned
above.165
Gross and Net NPAs
There are two concepts related to NPAs: gross and net. Gross NPA refers to all
NPAs on a bank's balance sheet irrespective of the provisions made. It consists
of all the non-standard assets, viz. substandard, doubtful, and loss assets. Net
NPAs are gross NPAs less provisions. In India, because bank balance sheets
contain a huge number of NPAs and the process of recovery and write-off of
loans is very time consuming, the provisions the banks have to make against the
NPAs, according to the Reserve Bank guidelines, are quite significant. That is
why the difference between gross and net NPAs is quite high. While gross
NPAs reflect the quality of the loans made by banks, net NPAs show the actual
burden to banks. The requirements for provisions are: 100 percent for loss
assets; 100 percent of the unsecured portion plus 20 percent to 50 percent of the
secured portion, depending on the period for which the account has remained in
the doubtful category; and 10 percent general provision on the outstanding
balance under the substandard category.
Gross NPA is an advance which is considered irrecoverable, for bank has made
provisions, and which is still held in banks' books of account. Net NPAs are
those type of NPAs in which the bank has deducted the provision regarding
NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance
sheets contain a huge amount of NPAs and the process of recovery and write off
of loans is very time consuming, the banks have to make certain provisions
against the NPAs according to the Central Bank guidelines.
165
The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines
and Directions, 2003
136
The NPAs movement of private sector bank shows a positive trend as they are
able to better manage compared to Public Sector banks. The above graphs show
that the Private Sector banks are better able to manage the NPAs as compared to
Public Sector bank. The data stated that nationalized banks accounted 64.05%
in total – and witnessed gross NPAs at Rs 5.07 lakh crore from Rs 4.18 lakh
crore in Financial Year 2016. Last fiscal, it accounted for 68.30% of total gross
NPAs.
0
1000
2000
3000
4000
5000
6000
7000
NP
As
Am
ou
nt
(in
'0
00
s C
rore
s)
Financial Year
Figure 4.1 Gross and Net NPAs Amount of Scheduled Commercial
Banks
Gross NPAs Amount Net NPAs Amount
Source : Department of Banking Supervision, RBI
0
1000
2000
3000
4000
5000
6000
NP
As
Am
ou
nt
(in
'0
00
s C
rore
s)
Financial Year
Figure 4.2 Gross and Net NPAs Amount of Public Sector Banks
Gross NPAs Amount
Net NPAs Amount
Source : Department of Banking Supervision, RBI
137
Nationalised banks saw decline mainly because private banks have seen rise in
their share of total gross NPA. Private Banks gross NPAs stand at Rs 93,209.2
crore in Financial Year 2017 (having share of 11.78%) versus gross NPAs of Rs
56,185.70 crore (with share of 9.18% share) in Financial Year 2016. the
combined gross NPAs of State Bank of India group stood 1.6 Lakhs ores on
December 31, 2016 which is equivalents to 8.6% of the total assets , while the
net NPAs were at 5.33%. 166
The gross NPAs of public sector banks have risen
to Rs 6.06 Lakhs Cr. in December 2016, from Rs 5.02 Lakhs Cr. at the end of
March 2016.The Gross NPA (GNPA) ratio of the banking system stood at 9.6%
and the stressed advances ratio stood at 12% as of March 31, 201
Reserve Bank of India is empowered to prescribe the guidelines on
Classification of NPA.167
As the concept of the NPA is dynamic- as it changes
with the change in the financial regime and thus requires continuous monitoring
and updating.
NPA is defined as ‘an account of a borrower which has classified’ by a Creditor
either ‘as a sub-standard asset or a doubtful asset or a loss asset’ of the Creditor
and such a classification is required to be made in accordance with the
directions or guidelines relating to assets classification issued by the Reserve
Bank. RBI guidelines governing the ‘classification of accounts’ and related