A robust banking sector is the backbone of the economy, thus failure of the banking sector may result in an adverse impact on other sectors. Non-performing assets are one of the major concerns for banks in India. Higherthe level of NPAs, it suggests more likelihood of credit defaults that affect the productivity and net-worth of banks.

One of the main causes of NPAs into banking sector is the directed loans system under which commercial banks are required a prescribed percentage of their credit (40%) to priority sectors.

There are several reasons for an account becoming NPA.

  • Internal factors
  • External factors

Internal factors

  • Business Failures
  • Funds borrowed for a specific purpose but not utilized for the supposed purpose.
  • Project not completed in time
  • Excess volumes created at non –economic costs
  • Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delay in settlement of payments\ subsidiaries by government bodies etc.

External Factors

  • Sluggish legal system .
  • Scarcity of raw material, power and other resources.
  • Industrial recession.
  • Government policies like excise duty changes, Import duty changes etc.,

Hence providing loans to eligible borrowers, feasible economic activity, providing adequate finance and timely disbursement, utilization of funds for the right purpose, servicing the loans in time are absolutely necessary pre conditions for preventing or minimizing the incidence of new NPAs.