Npa Financial System

I INTRODUCTION

It has been said by many economists that smooth flow of savings and investments is the key factor for a well-developed financial system ,supports economic growth (King and Levine, 1993) . A sound financial system can help in achieving efficiencies in socio-economic factors. To make a financial system well functioning one of the desirable characteristics is to control at the level of non-performing assets (NPA) .For the growth of any economy smooth flow of credit is essential and NPAs beyond a particular level are the cause for concern so far the smooth economic growth is concerned so it’s essential to control the level of NPAs. Banks are usually raising resources not just at fresh deposits, but also by the funds

The importance of the matter in terms of the concept, its introduction in Indian banking industry, the impact on profitability and image of the banks imposed a need to take an urgent step to switch over to international norms such as Basel II norms. The definition of NPAs has changed over time its defined as an loan where payment of interest or repayment of instalment (in case of term loans) or both remains unpaid for a certain period. According to the Narasimham Committee Report (1991), those assets (advances, bills discounted, overdrafts, cash credit etc.) on which the interest remains unpaid for a period of four quarters (180 days) to be considered as NPAs. Subsequently, this period was reduced to 90 days from 180 days from March 1995. Though the concept of NPA has received attention in the post reform period still research work on the subject in not adequate (Ghosh, 2005) [3].

1.2 ORIGIN AND CONCEPT OF NPAS

Report of the Committee on the Financial System:. Suhas S. Sahasrabudhe (2003)[6], in his article “Review of Important Aspects of NPAs of Banks in India in The Post Reform Period” has list out the terms of reference of the committee on the financial system in August 1991, under the chairmanship of Shri M.Narasimham, the former Governor of Reserve Bank of India as under:

i) Examination of the

The Committee considers that Banks at current time period experience difficulties in recovering the loans because of the delays caused by our legal system and it results in the blocking of a major portion of the funds in nonproductive assets,Hence ,Committee recommends that Tribunals on the issue recommended by the Tiwari Committee be set up to speed up the process of recovery along with the introduction of legislative measures to speed up the recovery process.

1.3 INTERPRETATION AND VIEWS ON RBI GUIDELINES

Joshi (2003)[7], in his article “Non-Performing Assets - Causes, Extent and Remedies” has observed few concept related irregularities in the guidelines issued by the RBI as under:

The NPA actual position in Indian Banking sector is exaggerated, although its called NPAs, the ratio of non-performing credit is related to the credit and not to assets. In fact, the internationally accepted norm is to relate the ratio to total assets not to the total credit. In India loans forms only 52 per cent of the total credit-deposit ratio. The remaining 48 per cent of the assets are held in CRR (5 per cent) and SLR (38 per cent) 5 per cent being other assets. 43 per cent of the assets (CRR+SLR) are the safest being held as funds with the RBI and in gilt-edged securities. If the ratio is to be related to the total assets ,the net NPA ratio in the Indian Banking System