NPAs Management in Indian Banking - Policy Implications

Abstract

The banking industry in India was passing through a critical phase in late eighties when questions were raised about the viability of the banking institutions. Financial reforms were introduced along with economic reforms in early nineties to make the banking system more efficient, viable and responsive to changing economic environment, so as to develop a financial sector that could be globally competitive. The introduction of various reforms in a phased manner did result in strengthening the system, as was evident from various indicators such as improvement in capital adequacy, reduction in non-performing assets, increased return on assets and equity etc. However, the greatest challenge to banking industry during last one and a half decade of their growth has been management of Non- Performing Assets (NPAs). The model for understanding causes for NPAs focuses on implications of factors such as credit deposit ratio, gross domestic product, priority sector advances, bank rate etc. The purpose is to come out with policy implications to manage NPAs at macro level. Simultaneously an attempt has been made to suggest specific strategies by diagnosing lender related, borrower related and external factors contributing to NPAs. The paper also attempts to spell out policy implications at macro and bank level to effectively manage NPAs that can have generic implications.

Keywords: NPAs, Banking, Policy, Management

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