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Management of Non-Performing Assets in Indian Public Sector Banks with special
reference to Jharkhand
Abstract
I. Introduction
The banking industry has undergone a sea change after the first phase of economic liberalization in
1991 and hence credit management. While the primary function of banks is to lend funds as loans to
various sectors such as agriculture, industry, personal loans, housing loans etc., in recent times the
banks have become very cautious in extending loans. The reason being mounting non-performing
assets (NPAs). An NPA is defined as a loan asset, which has ceased to generate any income for a bank
whether in the form of interest or principal repayment. As per the prudential norms suggested by the
Reserve Bank of India (RBI), a bank cannot book interest on an NPA on accrual basis. In other words,
such interests can be booked only when it has been actually received. Therefore, this has become what
is called as a ‘critical performance area’ of the banking sector as the level of NPAs affects the
profitability of a bank as shown in the figure below.
Figure 1 here
Therefore, an NPA account not only reduces profitability of banks by provisioning in the profit and
loss account, but their carrying cost is also increased which results in excess & avoidable management
attention. Apart from this, a high level of NPA also puts strain on a banks net worth because banks are
under pressure to maintain a desired level of Capital Adequacy and in the absence of comfortable
profit level, banks eventually look towards their internal financial strength to fulfill the norms thereby
slowly eroding the net worth.
Today the Net NPAs of Indian PSBs (wh ...