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Asset quality in banks improve considerably

Gross NPAs (non-performing assets)in Indian banking sector have declined sharply to close to 3.0 per cent in 2006 (15.7 per cent at end-March 1997). Net NPAs of the banking sector are now at close to one per cent and the gap between the gross and net NPAs has narrowed over the years. Recovery of dues is also more than the fresh slippages.

The decline in NPAs is particularly significant as income recognition, asset classification and provisioning norms were tightened over the years. For instance, banks now follow 90-day delinquency norm as against 180-day earlier. An asset is now treated as doubtful if it remains unpaid for more than 120 days instead of 180 6-11-06 revised days earlier. Banks are also required to make general provisioning (0.40 per cent) for standard advances, barring banksÝ direct advances to agricultural and SME sector. The general provisioning requirement is 1.0 per cent for certain sensitive sectors.

According to Reserve Bank of India, improved profitability, underpinned by robust macroeconomic environment and upturn in interest rate cycle, has enabled banks to reduce the backlog of NPAs.

Improvement in the credit appraisal process and new institutional mechanisms created by the Government and the Reserve Bank for resolution of NPAs (including enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002; Lok Adalats; debt recovery tribunals; and corporate debt restructuring mechanism) have also played a significant role.

Although asset quality in the banking system has improved considerably over the years, ,banks need to guard against any deterioration of credit quality, particularly in the wake of significant expansion of credit. RBI feels that Banks need to have a comprehensive system in which the process of risk monitoring is combined with proper risk assessment. This would entail creation and maintenance of an appropriate data base on risk assessment and credit extended, which would be required to be updated periodically.

The enactment of the Credit Information Companies (Regulation) Act is an important development in this regard. As the Reserve Bank issues guidelines for such companies to be formed, the availability of credit information to banks can be expected to increase over time. This should help significantly in risk assessment and monitoring, thereby leading to lower transaction costs.

NPAs of the Indian banking system are now comparable to several advanced economies and significantly lower than several economies in the Asian region. RBI rates reduction in non-performing assets (NPAs) as one of the major achievements of the Indian banking sector in recent years.

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