Introduction To The Study: Non-Performing Asset Means An Asset in The Bank's Book or Loan Account of Borrower

1.
INTRODUCTION TO THE STUDY
1.1 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).
It's a known fact that the banks and financial institutions in India face the problem of
swelling Non-Performing Assets (NPAs) and the issue is becoming more and more
unmanageable. In order to bring the situation under control, some steps have been taken recently.
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 was passed by Parliament, which is an important step towards elimination or reduction
of NPAs.
In liberalizing economy banking and financial sector get high priority, Indian banking
sector of having a serious problem due to non-performing assets. The financial reforms have
helped largely to clean NPA was around Rs.90,170 crores in the year 2009. The earning capacity
and profitability of the bank are highly affected due to this.
Non-Performing Asset means an asset in the Bank’s book or loan account of borrower,
which has been classified by a bank or financial institution as sub-standard, doubtful or loss
asset, in accordance with the directions or guidelines relating to asset classification issued by the
Reserve Bank of India.
Presently if monthly instalment is pending beyond 30 days that loan account is treated as
watch category account. In this period, the Bank will take all necessary steps to recover the dues
to turn the loan account as standard asset. If the monthly instalment is due beyond 90 days, the
banker treats the loan account as Non Performing Assets or NPA. In the beginning it will be
substandard assets, depriving the bank of interest on the loan and additionally, capital charge i.e.,
making provision for the loan in their profit and loss account.
1.2 BACKGROUND
Accepting deposits from the general public and granting of credit for economic activities
is the prime business of banking. Without a sound and effective banking system in India it
cannot have a healthy economy. The banking system of India should not only be hassle free but
it should be able to meet new challenges posed by the technology and any other external and
internal factors.
For the past three decades India’s banks system has several outstanding achievements to
its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans
or cosmopolitans in India. In fact, Indian banking system has reached ever to the remote corners
of the country. This is one of the main reasons of India’s growth process.
Banking sector reforms in India has progressed promptly on aspects like interest rate
deregulation, reduction in statutory reserve requirements, prudential norms for interest rates,
asset classification, income recognition and provisioning. But it could not match the pace with
which it was expected to do. The accomplishment of these norms at the execution stages without
restructuring the banking sector as such is creating havoc.
During pre-nationalization period and after independence, the banking sector remained in
private hands large industries who hand their control in the management of the banks were
utilizing major portion of financial resources of the banking system and as a result low priority
was accorded to priority sectors. Government of India nationalized the banks to make was to
expand their networks in rural areas and give loans to priority sectors such as small scale
industries, self-employed groups, agriculture and schemes involving women.
At a lower level Non Performing Assets (NPAs) has emerged since over a decade as an
alarming threat to the banking industry in our country sending distressing signals on the
sustainability and endurability of the affected banks. The positive results of the chain of
measures affected under banking reforms by the Government of India and RBI in terms of the
two Narasimham Committee Reports in this contemporary period have been neutralized by the
ill effects of this surging threat. Despite various correctional steps administered to solve and end
this problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted
universally on banking and financial institutions.
1.3 NEED OF THE STUDY
This report explores a Descriptive research to the analysis of Non-Performing Assets

(NPAs) with Special reference of Bank of India. The NPAs are considered as an important
parameter to judge the performance and financial health of banks. The level of NPAs is one of
the drivers of financial stability and growth of the banking sector. This report aims to find the
fundamental factors which impact NPAs of banks. The tools used for analysis is Ratio Analysis,
The results show that movement in NPAs over the years can be explained well by the factors
considered in the model for the Bank of India. The other important results derived from the
analysis include the finding that banks’ exposure to priority sector lending reduces NPAs.

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1.

INTRODUCTION TO THE STUDY

1.3 NEED OF THE STUDY

This report explores a Descriptive research to the analysis of Non-Performing Assets

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