Abstract
Financial sector reform in India has progressed rapidly on aspects like interest rate deregulation, reduction in reserve requirements, barriers to entry, prudential norms and risk-based supervision. But progress on the structural-institutional aspects has been much slower and is a cause for concern. The sheltering of weak institutions while liberalizing operational rules of the game is making implementation of operational changes difficult and ineffective. Changes required to tackle the NPA problem would have to span the entire gamut of judiciary, polity and the bureaucracy to be truly effective. This paper deals with the experiences of other Asian countries in handling of NPAs. It further looks into the effect of the reforms on the level of NPAs and suggests mechanisms to handle the problem by drawing on experiences from other countries.
Introduction
After nationalization, the initial mandate that banks were given was to expand their branch network, increase the savings rate and extend credit to the rural and SSI sectors1. This mandate has been achieved admirably. Since the early 90’s the focus has shifted towards improving quality of assets and better risk management. The ‘directed’ lending approach has given way to more market driven practices.
The Narasimhan Committee has recommended prudential norms on income recognition, asset classification and provisioning. In a change from the past, Income recognition is now not on an accrual basis but when it is actually received. Past problems faced by banks were to a great extent attributable to this. Classification of what an NPA is has changed with tightening of prudential norms. Currently an asset is “non-performing” if interest or installments of principal due remain unpaid for more than 180 days.
Non-performing Assets:
Definition:
An asset becomes Non-performing when it ceases to generate income for a Bank
It is also defined as credit facility in respect of