After studying about 800 top NPA accounts in 17 banks, RBI has found that, thefollowing in order of importance are to be the causative factors for loans turning into NPAs1.Diversion of funds, mostly for expansion / diversification of business or for promotingassociate concerns.2.Factors internal to business like product / marketing tailor, insufficient management,inappropriate technologies, labor unrest etc.3.Changes in the macro environment like recession etc.4.Time / cost over runs during project importance.5.Changes in the government policies and6.Deficiencies like delay in release of sanctioned limits by banks.The other reasons may include:Poor credit discipline.Inadequate credit and risk managementDiversion of funds by promotersFunding of non-viable projectsInadequate mechanism to gather and disseminate credit information amongst commercialbanks32
Effective recovery from defaulting and overdue borrowers was hampered on account ofsizeable overhang component arising from infirmities in the existing process of debtrecovery, inadequate legal provisions on for enclosure and bankruptcy and difficulties inthe execution of court decrees.REASONS FOR GROWING NPA’S:There are some reasons which are contributing for the growth of NPAs some of them areas follows.IN PRIORITY SECTOR ADVANCES:A.Direct personal native loans sanctioned under sponsored programmersB.Misutilisation of loans and subsidiesC.Diversion of funds.D.Absence of securityE.Lock of effective follow up.F.Decrepit legal systemG.Cost in effective legal recovery measuresH.Difficulties in execution of decrees obtainedI.Lack of marketing supportIN NON-PRIORITY SECTOR AND ADVANCES:A)Improper and inadequate credit appraisalB)Demand recessionC)Frequent change in government policies33
D)Industrial sickness and labor problemsE)Antiquate legal judicial systemF)Lack of legal reformsG)Division of fundsH)Willful defaultI)Incompetence of managementJ)Political compulsion and corruptionIMPACT OF NPAS ON THE OPERATIONS OF BANK:The impact of NPAs on different financial parameters is as follows:Drain on profitabilityHigher provisioning requirement on mounting NPAs, thereby badly impacting the capitaladequacy.Reduction in the earning capacity of assets.Adverse effect on credit growth as the banker’s prime focus becomes zero percent riskand as a result turns to fresh credit.Excessive focus on credit risk management.High cost of funds due to NPAsNPA MANAGEMENT – PREVENTIVE MEASURES:Formation of the Credit Information Bureau of India Limited (CIBIL)34
Release of willful defaulter’s list. RBI also releases a list of borrowers with aggregateoutstanding of Rs. 1 crore and above against whom, banks have filed suits for recovery oftheir fundsReporting of frauds to RBI.