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2B 024 Banking Project

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    Batch: 2B  Name: ABHISHRI MOHTA Roll No.: 024 Topic: Understanding NPAs over last 2 years   EXECUTIVE SUMMARY: The banking sector is the backbone of the Indian economy. In this project, the NPAs of  public and private sector banks in India has been compared over a period of two years (2015-16 to 2016-17). With the introduction of international norms for income recognition, asset classification and provisioning in the banking sector, managing NPAs has emerged as one of the major challenges facing Indian banks. From this analysis, it is evident that private sector banks are performing well in reducing the level of NPAs than public sector banks. This is an alarming figure to the Indian economy; therefore, the public-sector banks have to take necessary steps in recovery of loans like war footing method. Public Sector Banks (PSBs) in India have performed rather poorly over the  past 3-4 years. For the most part this has been on account of Non-Performing Asset (NPA) related worries which have so far been brushed under the carpet. The current level of NPAs as disclosed by most public-sector banks are far from reality and made possible because of the flexibility enjoyed by PSBs in terms of disclosure requirements.  INTRODUCTION: Granting of credit facilities for economic activities is the primary task of banking. Apart from raising resources through fresh deposits, borrowings etc recycling of funds received back from borrowers constitutes a major part of funding credit dispensation activities. One of the major challenges for the Indian banking system is to address the NPA issue which has also affected the profitability of banks besides coming in the way of future bank lending as banks have been cautious while lending especially for long term purposes. Avoidance of loans losses is one of the pre-occupations of management of banks. While complete elimination of such losses is not possible, bank managements aim to keep the losses at low level. In fact, it is the level of non-performing advances, which to a great extent differentiates between a good and a bad bank.  Now let us first look into the definition of what is a NPA and its various types: Non-Performing Asset (NPA)  –   Meaning  NPAs refer to loans which are in risk of default. Reserve Bank of India (RBI) defines NPAs as below: An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. As per guidelines issued by the RBI, banks classify an account as NPA only if the interest due and charged on that account during any quarter is not serviced fully within 90 days from the end of the quarter. Banks are required to classify NPAs into the following 3 categories based on how long do they remain non-performing. The three categories are  –   Substandard Assets, Doubtful Assets and Loss Assets. Substandard Assets  –   If an account remains as NPA for a period less than or equal to 12 months Doubtful Assets  –   An asset would be classified as doubtful if it has remained in the substandard category for 12 months. Loss Asset  –    A loss Asset is one where loss has been identified by the bank’s internal or external auditors or upon an RBI inspection.    Source: The Hindu Further, NPA’s are of broadly two type:  Gross NPA and Net NPA Gross Non-Performing Assets (GNPAs): Gross NPA is the sum of all loan assets that are classified as NPA as per RBI guidelines. Gross NPA Ratio is the ratio of gross NPA to gross advances (loans) of the bank. Non-Performing Assets (NPA) ratio:  Net NPAs are calculated by deducting provisions from gross NPAs. The net NPA to advances (loans) ratio is used as a measure of the overall quality of the bank’s loan book.   Net non-performing assets = Gross NPAs  –   Provisions FACTORS AFFECTING NPA: The banking sector are facing problems in NPA rising. As compare to private and foreign  bank public sector bank has more rising NPA  (WE WILL FURTHER LOOK WHY). The  NPA will rise due to internal and external factors of the environment. Some of the factors are as follows. INTERNAL: 1.   Inappropriate Technology : Due to inappropriate technology and management information system, market diversion decisions on real time basis cannot be taken. Proper MIS and financial accounting system is not implemented in some banks, which leads to poor credit collection and thus NPA. All the banks should be computerized to overcome this factor. 2.   Poor Credit Analysis:  Credit analysis is an important factor in loan procedure. Sometimes because of poor credit analysis leads to rising in the NPA. To overcome this they have to implement the good credit analysis system. 3.   Re loaning process:  Non-remittance of recoveries to higher financial agencies and re-loaning of the same having already affected the smooth operation of the credit cycle.
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