Vinod Chandrashekhar Dixit
NPA in banking sector may be termed as an asset not contributing to the income of the bank. NPA is part of the operational risk of the banking industry. The problem of NPAs has secured an important place not only in the realm of regulatory policy discussion in banking, but also in general public discussions on the safety and soundness of banks and financial institutions. The quality of a bank’s loan portfolio can impact its profitability, capital and liquidity. Asset quality problems are at the root of other financial problems for banks, leading to reduced net interest income and higher provisioning costs. If loan losses exceed the Bad and Doubtful Debt Reserve, capital strength is reduced. The biggest ever challenge that the banking industry today faces is management of the NPAs. The NPAs in PSBs are growing not only due to external factors like ineffective recovery tribunals, willful defaults, natural calamities, industrial sickness, lack of demands, labour problems, changes in the government policies etc. but also internal factors like managerial deficiencies, inappropriate technologies, poor credit appraisal systems, improper SWOT analysis, absence of regular industrial visits etc. It is now clear that there are various internal and external factors behind the NPAs in Banks. Lack of proper supervision, monitoring and follow-up is one of the responsible for increasing ration of NPA in Banks. Lack of awareness and basic education in many parts of the rural and semi-urban areas have added to the problem. Today the quality of the loan assets is most important factor for the basic viability of the banking system. The overdue advances of banks in India are mounting and in consequence the NPAs in their portfolio are on the rise, impinging on the banks viability.
It is very important that only specialized technical staff, equipped with the latest marketing information and technological developments at the bank level deal with the matter. There are cases where the borrower furnish incorrect position of the operations and stock statements owing to the fear that admission of the true position they would precipitate bank action on the other bank despite knowing that unit is vague they feels satisfied and reassured by the fact that stock statements shows its security at least on the paper and thus such accounts turn NPAs. Now it is a common experience of a banker that without a proper monitoring and follow-up, performing advances may be converted into non-performing assets. There is an urgent need to prepare specialized teams who can deal with the recovery and for reducing the further NPAs in banks. Rising Bad loans are a concern for banks as they have to set aside more money in the form of provisions to cover such loans.
The higher this amount, the more is the impact on profits. This will affect profitability as banks do not earn any interest on bad loans and, on top of that, they need to set aside money for such loans. Avoidance of loan losses is one of the pre occupations of management of banks.
While complete elimination of such losses is not possible, bank managements aim to keep the losses at a low level.
In fact, it is the level of NPAs which to a great extent differentiate between a good and a bad bank. The rise in NPA is because there is some stress in bigger accounts, which we did not see earlier. It is nice that Banks have made recovery process robust and are taking legal action. Net NPAs as a percentage of loans may not be a good yardstick to judge a bank’s health as it can always make hefty provisions to bring it down.
Proper management of NPAs is need of the hour. To be effective, Banks need to keep in mind the following tips.
- It is compulsory to form Recovery Team at each branch consisting of staff members conversant with the borrowers and their villages.
- Each Branch should have area wise/village wise list of NPA borrowers, so that follow-up becomes easier as lot of time can be saved in visiting places time and again. This will help in contacting maximum borrowers in a single visit.
- Staff meetings should be held on monthly basis regularly & prevailing NPA level of the branch should be discussed.
The reduction in NPA achievements and progress should be reviewed in such meetings. Individual contribution of employees in reducing the NPA should be taken note of and appreciated. - Defaulting borrower’s names under various sponsored programmes should be conveyed to sponsoring agencies for mustering their help for recovery.
- For early repayment of overdues, local pressures may be brought on borrowers. To pressurize the defaulters, influential personalities in the borrowers’ village should be contacted.
- A close rapport with government officials should be maintained and their assistance sought for recovery.
- A recovery climate should be created by arranging village meets at frequent intervals.
- Care should be taken to update the records of borrowers as soon as inspections are undertaken.
- Regular inspections are necessary in suit filed accounts as there is every chance that the borrower may dispose of the assets with the sole intention to defeat the execution of decree and attachment of assets.
- A close rapport and follow up should be maintained with the branch advocate in respect of quick disposal of suits. Execution of decrees should be hastened through branch advocates.
- A close & constant rapport needs to be maintained with the guarantors and their assistance should be sought for early regularization of the account.
- In the cases, where accounts are overdue, sticky and security being weak rendering recovery impossible in the normal course through attachment, reasonable compromise with bare minimum sacrifice should be considered giving top priority.
- When there are no chances of recovery, write-off of sticky and bad debts it should be undertaken on priority basis after availing DICGC claims.
- It is to be remembered that recovery process is an ongoing concept and constant persuasion only can bring fruitful results.
The performance of a bank is inextricably linked with its asset quality. Managing the loan portfolio to minimize bad loans is, therefore, fundamentally important for a financial institution in today’s extremely competitive and market driven business environment.
