The Narasimhan committee introduced the concept of non- performing assets. And it is the best way for judging the status of the bank. The burden will lie on the bank for the non-payment of loans. When the loans are not repaid there will be a huge loss to the bank and there will be money to transact between the customers. It is a risk arising from the customers to the bank. The bank needs to bear all the risks. Nowadays non-performing asset is kept on increasing in both public sector banks and private sector banks. They face ultimate survival in the market. As compared to public sector-private sector banks have less non-performing assets, and their net worth is slightly increasing. NPA hurts funds over banks in capital markets. The government of India propounds many policy and rules to decrease and control over non-performing assets. Non-performing assets are the only reasons to fall on revenue. The object of this comparison between the private sector banks and public sector banks is to outcast the impact between them and the reasons behind the banks on non-performing assets. And to suggest the way to reduce the non-performing assets. And also causes for the increase in non-performing assets.
- The lack of liquidity prevents banks from lending for other productive activities in the economy. The curb in investments may slow down the economy leading to unemployment, inflation, bear market, etc.
- Rising NPAs undermine the bank’s image, making the public lose trust in banks. The depositors may withdraw their deposits causing liquidity issues for banks.
- To maintain their profit margins, banks will be forced to increase interest rates which again hurt the economy.
Factors behind High NPA Growth
From 2006-2011, Indian economy was going through high growth phase and consequently there was a rapid credit growth.
During the period from 2006-2011, when GDP growth rate was an all-time high, the growth of industrial credit was much higher. Even when the overall credit growth declined, the industrial credit increased. When after 2011, the GDP growth mellowed down, the profit margin of industrial sector declined and corporates started defaulting their loan payments and NPAs started increasing.
In 2015, RBI revised its guidelines for NPAs after which, banks had to recognise some assets as NPAs which were earlier accounted as standard assets. This lead to the sharp increase in NPAs after 2015 merely due to accounting changes. In other words, some NPAs were not recognised as NPAs by the banks.
Responsible to Borrower
The Longer gestation time is held between the transaction with the bank, were the bank according to its transaction the importance is not equally distributed and hence there is a lack of management in banks over borrowers. Apart from that the diversion of funds to unrelated business or fraud lapses in initial borrowers due to the due diligence and inefficiencies in the monitoring process for the reasons of bad loans in the bank. And there is an inadequate research and development over the borrower.
If the bank evaluates less capital the future business concern, which affects the position of banks and creating a mismatch between the assets and liability and they force the bank to raise the resources at a high rate. So, there will be an impact on the profitability of banks, were they not able to recover the amount from the borrower the level of profits will come down.
Undermine Bank’s Image
Increase in non-performing assets which shadows the domestic markets and global level markets, on that situation the bank profitability decreases which lead to the bad image to banks.
Effect on Funding
Increase in non-performing assets leads to scarcity in funding to other borrowers. As well as the Indian capital market also get affected. And then there will be only a few banking institutions lend money.
Higher Cost of Capital
It shall result in increasing the cost of capital as banks will now have to keep aside more funds for smooth operations.
High on non-performing assets, low profitability, high risk in business and work against the bank and may take the two circumstances survival of the bank. And it affects the risk-bearing capacity of the bank.
The which makes low profits have lower capital adequacy ratio and the low capital ratio which limits the further creation of assets. Such kind of banks face difficulties in their growth, expansion, and plans and there they need not wherewithal to march boldly on these fronts. In these growth failures in the expansion, the only consequences and stagnation and negative growth.
- They reduce net interest income as they do not charge the interest to these accounts.
- Servicing non-performing assets need to be prudentially provided for. This will again lead to reduced profitability.