The banking sector has been facing the severe problems of the rising NPAs. But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks, the NPAs in PSB are increasing due to external as well as internal factors.
1. External Factors
a. Ineffective recovery tribunal
The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances, due to their carelessness and ineffectiveness in their work the bank suffers the consequence of non-recover, their by reducing their profitability and liquidity.
b. Willful Defaults
There are borrowers who are competent to pay back loans but are intentionally withdrawing it. These groups of people should be recognized and proper measures should be taken in order to get back the money extended to them as advances and loans.
c. Natural calamities
This is the measure factor, which is creating alarming increase in NPAs of the PSBs. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. Thus the bank has to make large amount of provisions in order to pay damages those loans, hence end up the fiscal with a reduced profit. Basically ours farmers depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to attain the production level thus they are not repaying the loans.
d. Industrial sickness
Inappropriate project handling , ineffective management , lack of adequate resources , lack of advance technology , day to day changing govt. Policies produce industrial sickness. Therefore the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity.
e. Lack of demand
Entrepreneurs in India could not predict their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. The banks recover the amount by selling of their assets, which covers a smallest label. Therefore the banks record the non recovered part as NPAs and has to make provision for it.
f. Change on Govt. policies
With every new govt. banking sector gets new policies for its operation, so it has to cope with the changing principles and policies for the regulation of the rising of NPAs. For example, the fallout of handloom sector is continuing as most of the weavers Co-operative societies have become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by the Central government to renew the handloom sector has not yet been implemented, so the over dues due to the handloom sectors are becoming NPAs.
2. Internal Factors
a. Defective Lending process
There are three cardinal principles of bank lending that have been followed by the commercial banks, that is, Principles of safety, Principle of liquidity, Principles of profitability. Principles of safety mean that the borrower is in a position to pay back the loan, including both principal and interest. The refund of loan depends upon the borrowers, Capacity to pay and Willingness to pay.
Capacity to pay depends upon, Tangible assets, Success in business. Willingness to pay depends on, Character, Honest, Reputation of borrower. The banker should, therefore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is competent of carrying it out successfully, he should be a person of integrity and good character.
b. Inappropriate technology
Due to improper technology and management information system, market driven decisions on real time basis can not be taken. Proper MIS and financial accounting system is not implemented in the banks, which leads to poor credit collection, so NPA, therefore all the branches of the bank should be computerized.
c. Improper SWOT analysis
The inappropriate strength, weakness, opportunity and threat analysis is another reason for increase in NPAs. While providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and credit worthiness of the borrower, so, banks should consider the borrowers own capital investment and bank should collect credit information of the borrowers from, a. Bankers b. Enquiry from market/segment of trade, industry, business. c. From external credit rating agencies.
Banker should examine the balance sheet which shows the true picture of business will be revealed on analysis of profit/loss a/c and balance sheet. When bankers give loan, he should examine the purpose of the loan. To make sure safety and liquidity, banks should grant loan for productive purpose only. Bank should examine the profitability, viability, long term acceptability of the project while financing.
d. Poor credit appraisal system
Deprived credit appraisal is an additional factor for the increase in NPAs, due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use better credit appraisal to reduce the NPAs.
e. Managerial deficiencies
The banker should always select the borrower very cautiously and should take tangible assets as security to safe guard its interests. When accepting securities, banks should consider, the Marketability, Acceptability, Safety, Transferability etc. The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”, which means that the banker should not grant advances to a few big farms only or to concentrate them in few industries or in a few cities. If a latest big customer meets misfortune or certain traders or industries affected adversely, the overall position of the bank will not be affected.
f. Absence of regular industrial visit
The irregularities in spot visit also increases the NPAs, absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. So the NPAs can be collected by regular visits.
The growth and proliferation in the activities of the bank has led to ever-increasing non-performing assets that have mounted to a huge amount during the last decade or so. The quantum of NPAs has been calculated and put at different figures mainly due to absence of correct statistics and the method on the basis adopted for calculating the percentage of NPAs in relation to either the total assets of the bank or the quantity of loan portfolio or on the basis of the number of the accounts or the size of the outstanding advances.
For a large number of years, the banks have been taking credit in its books, on basis of accrued interest income, even for the sum of periodic interest that was not really paid by the borrower. This was done by raising debit in suspense account and crediting amount equivalent to the periodic interest in the loan account of the borrower.
After objections from the auditors and income tax authority the banks altered strategy and started giving extra loans to the defaulting borrowers for the purpose of making payments to the bank for adjustment of the over dues, in many cases the due dates of payments were postponed and even the entire period of the loan was extended further again and again. As if to attach fire to the fuel, ambitious programme for branch progress and extension of banking services led to new recruitments, transfers, relocation and unhealthy competition amongst offices of the same bank, but at the same time adequate facilities available for training of the staff were not expanded.
In the anxiety to attain business targets the rules and procedures for prudent banking were conveniently forgotten. Even the senior management setup conveniently relaxed the rules for proper appraisal of the loan proposals, the provisions of standard bank sanction letter, errors in execution of the loan agreements, deeds of hypothecation and mortgages were more often overlooked for compliance in the hurry for disbursement and attainment of targets for purposes of building up record of achievements and reporting.