Banks are essential in the economic development of any country. They mobilize savings and deploy funds to productive sectors.
Lending is the activity that finances the agricultural, commercial, and industrial sectors.
However, it is a known thing that when the banking system becomes fragile, it hampers the development of the economy and brings economic crisis if remedial actions are not taken.
In the Indian context, the banking system until the 90s was predominantly managed by the governments. Regulations and political interference were rampant, and the entry to the outside world was restricted.
The “closed” banking system was, however, “open” for those who had access to the system.
There were no standards established, and opaque balance sheets were used as tools to cover the deficiencies.
It resulted in the deterioration of the banking system for common people. The major points of concern were low profitability and the high percentage of Non-Performing Assets or npa in india.
How do banks manage the problem of NPA?
• Banks are following a more transparent process to handle loans.
• They need to spell out the absolute figures of NPA and ratio on a quarterly basis.
• Banks introduce provisioning norms on the principle of conversion. It means a bank has to anticipate no profit but provide for the losses.
• There have been more strict norms to take security from borrowers against the money lent by them.
• The practice of ‘evergreening’ the bad loan by giving further advance to the borrower was the main reason for the high NPA ratio. The practice has been stopped after the new laws were enforced.
• Special tribunals and judiciary systems have been established to carry out npa account settlement on a fast track basis. It has brought down the delays in giving decisions for NPA disputes.
These measures help banks and financial institutions for npa management to keep it under the permissible limits.