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
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.
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.
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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