1. Name: Nikhita Borse
College: Sydenham Institute of
Management Studies, Research and
Entrepreneurship Education
Email id: nikhita.borse@simsree.net

2. Rising NPAs: A challenge to the Indian
Banking Industry and solutions in the
offing
Banking industry has grown massively in
India. For a developing economy and
emerging market like India, it acts as a
backbone for overall growth. With the new
government and their initiatives a healthy
banking industry acts as a catalyst to achieve
the set targets. For the success of initiatives
like Make in India, Digital India, Start up
India Stand up India etc. banking industry
should be competent.
Non-Performing Assets (NPA) refers to the
loans which the borrower fails to repay,
either principal or interest payment for a
certain period of time. PSU banks form the
major portion of Indian banking system,
with State Bank of India (SBI) accounting to
about a quarter of the total banking sector.
NPA problem of PSU banks have been
evolved through many years. Gross NPA of
the public sector banks elevated to 5.43% in
the end of March 2015 as against 4.72% in
March 2014, according to Reserve Bank of
India (RBI). It was estimated that top 10
borrowers of PSU banks account for Rs
28000 crore.
Rising NPAs becomes a challenge to the
Indian Banking Industry as it weakens the
bank’s revenue system. An increase in non-
performing assets can be handled by banks
in short term period with the aid of existing
capital or other reserves. But NPAs pose as
a threat to banking system on a long term
basis.
Impacts of NPAs are as follows:
 Bank’s shareholders may lose
invested money as cash inflow is
affected.
 Due to weak market sentiments
fewer banks will be willing to lend
causing scarcity of funds in the
market.
 Interest on loans will increase which
will negatively impact borrowing
rates causing less flow of money in
the market
 Lower amount of money in the
market will hamper buying
capacities of individuals that will
impact the overall demand in the
economy
 Lower the demand causes higher
inflation and unemployment level
increases.
 This crisis will hamper economy at
all levels
Factors leading to rising NPAs
Around 2011-2013 banks rushed to give
corporates loan irrespective of the credit
perception and expecting a higher
returns which boosted NPA levels in
banks. Various external and internal
factors contributed to rising NPAs
External Factors:
 Global economic slowdown
hampered the exports of various
goods and services which
impacted involved corporate
sector.
 Impact on power, metals, mining
etc. sectors lead to disruption in
the running of corporates

3.  Priority sector lending in India
also has contributed significantly
to NPAs
Internal Factors:
 Not adhering to know your
customer process and
indiscriminate lending by banks.
 Fraud and misappropriation by
directors of companies. (Like in
case of Surya Vinayak Industries
and Deccan Chronicle Holdings.
Surya Vinayak Industries, a
commodities firm based out of
New Delhi, has an NPA of about
Rs 2,500 crore on the books of
many public sector banks. Punjab
National Bank, which was the
lead banker to the company, had
accused its directors of fraud and
misappropriation. Media firm
Deccan Chronicle Holdings has
debt of about Rs 4,000 crore.
Most of its creditors have
categorized their exposure to the
company as NPA).
 Repeated ever greening of
corporate loans by state-owned
banks.
Solutions in the Offing:
For any economy, its growth depends on the
health of the financial aspect of it. Keeping
the legal aspects in to consideration the non-
performing assets' issue should be resolved
according to the varied situations.
 Know your customer guidelines to
be followed so that borrowers repay
the loan and situation of bad debt be
avoided. Conservatism should be
observed and lending to NPA tagged
entities should be avoided.
 The Securitization and
Reconstruction of Financial Assets
and Enforcement of Security Interest
(SARFAESI) Act, 2002 – The Act
empowers Banks / Financial
Institutions to recover their NPAs
without the involvement of the
Court, through obtaining and
disposing of the secured assets in
non-performing assets’ accounts
with outstanding amount of Rs. 1
lakh or more. First the banks have to
issue a notice then on the borrower’s
failure to repay the loan; banks can
take possession of the security and/or
take over the management of the
borrowing concern and appoint a
person to manage the concern.
 Recovery of Debts Due to Banks and
Financial Institutions Act (DRT):
The Act provides setting up of Debt
Recovery Tribunals (DRTs) and
Debt Recovery Appellate Tribunals
(DRATs) for swift and exclusive
disposal of suits filed by banks /
financial institutions for recovery of
their dues in non-performing assets’
accounts with outstanding amount of
Rs. 10 lac or more. Government has,
till now set up 33 DRTs and 5
DRATs all over the country.
 Lok Adalats: Section 89 of the Civil
Procedure Code provides resolution
of disputes through ADR methods
such as Arbitration, Conciliation,
Lok Adalats and Mediation. Lok
Adalat mechanism offers swift, in-
expensive and mutually acceptable

4. way of settlement of disputes.
Government has advised the public
sector banks to utilize this
mechanism to its complete potential
for recovery in Non-performing
Assets cases.
The issue of NPAs did not happen
overnight, it was an effect of stress in a few
large accounts as well as slippages from
restructuring accounts and hence there is no
instant solution to fix it. Proper measure
should be taken to prevent bad loan issue
and the above solutions will help eradicate
the non-performing asset problem.
Reference:
http://economictimes.indiatimes.com/topic/
NPA