Essay on NPA – Non Performing Assets- A Nightmare For Banks ( Causes and Solution)
560 Words essay on NPA – Non Performing Assets- A Nightmare For Banks ( Causes and Solution).
Assets are classified into two major categories- performing assets and non-performing assets. The performing asset is further categorised as standard assets and the non-performing assets are classified into sub-standard assets, doubtful assets and loss assets. If the instalments of the loan have not been paid for six months, the asset is declared as the non-performing asset. With effect from 31st March 2004, the loan or advance is declared as the non-performing asset when the interest or the instalments have not been paid for more than 90 days in term loan or if the account remains ‘out of order’ for more than 90 days regarding overdraft, cash or credit or if the bills remain overdue for over 90 days regarding the bills purchase or discounted bills.
These non-performing assets are a complete nightmare for the banking industry worldwide, especially for the public sector banks. According to the data collected in the year 2000, China witnessed the highest percentage of NPA, followed by Indonesia, Thailand, Malaysia and Philippines.
Causes Of The Problem In Different Countries
- India: The legal obstructions and the time consuming process of asset disposal are the foremost cause of NPA in India. Then there are manipulations by debtors using the political influence. It has been the cause of Industrial high debts. Apart from these, the failure of banks in getting the background checks before advancing the loans. This results in debtors eventually failing to pay the installments.
- China: In China, the State Owned Enterprises are always so sure that they will be bailed out in the case of any trouble and hence they don’t hesitate in taking high risks and do not really pay attention in increasing the profitability or operation efficiency. The social and political pressure on the government for restructuring the big State Owned Enterprises forces them to keep these SOEs afloat. Also, the bankruptcy laws in china favour the debtors.
- Thailand: The liberalized capital and current accounts results in NPAs the most in Thailand. And then we can’t oversee the fact that the legal system in Thailand makes the credit recovery very difficult and time consuming. The real estate speculators also take heavy loans predicting the growth in the sector and lose it all when that doesn’t happen.
- Korea: The longer periods of interest rate control and the allocation of selective credit gives way to the inefficient allocation of funds. Banks rely on collateral and guarantee a lot and hence oversee the earning and the cash flows.
- The banks should be strengthened thus reducing the risks. The standards of disclosure should be raised and the reforms of the SOEs should be spearheaded by reducing their debt levels.
- The asset management companies were created for taking care of the assets of indebted companies. This not only took care of the distressed companies but also helped them pay the loans off.
- The bankruptcy acts were amended.
- The debt restructuring commission for corporate were set up for taking over and restructuring of banks.
- The recapitalization of banks and setting up of AMCs were facilitated under the financial sector restructuring plans.
- International standards for loan classification and provisioning were adopted.
- The prudential norms were aligned to the international standard.
NPAs are a real problem for the entire banking industry all over the world. It is important that the reasons causing these NPAs should be figured out and sorted for the better economic condition of any nation.
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