Understanding reasons for NPA in public-sector banks

Abstract

Indian Banking system is majorly run by public-sector banks that account for 72.5% of loans. With high penetration into rural regions, public-sector banks play a vital role in government’s initiative to bank everyone. This responsibility also brings with its issue of efficiencies and performance. Bank performance depends on credits disbursement and the income through the interest. Principal repayment along with interest keeps the capital cycle inflow. But when there is a delay or no payment of interest and/or principal, then the cycle is severely affected. These non-paid loans are classified into a special class of asset, called non-performing assets (NPA). These assets hamper not only the capital cycle but also present organization’s weak operation system. This results in negative emotions among investors and reduces potential capital into the bank. The major reasons for NPA are both internal and external to the banks. Organizational structure, human capital, technology, government interference and economic changes play a critical role in the growth of NPA. Consistent competition with private sector banks and improving international standards has forced the government to provide impetus into the public-sector banks. Various committee reviews and international examples provide us with the opportunity to work on the improvement cycle of Indian banking system keeping public-sector banks at the focus. The emphasis is to improve operation using reforms at the policy level and additionally bring structural changes that make the system grow sustainably. With the implementation of policy changes, employees will have direct incentives towards bank performances to use infused capital in better investments. Credit reforms and no government intervention will empower them against faulty clients.