Introduction
NPA (Non Performing Assets) broadly defined as non-repayment of interest and installment of principal amount (Das & Ghosh, 2006). Amongst the various desirable characteristics of a wellfunctioning financial system, the maintenance
DOI: 10.4018/978-1-4666-6268-1.ch020
of the Non-performing assets is an important one.
NPA after a certain level is indeed a serious concern for the banking system because credit is essential for economic growth and NPA affects the smooth flow of credit. Banks increases their resources not only from the public deposits but also by multiplying the funds received from the borrowers (Bodla & Verma, 2006). Thus, when a loan turns into NPA, it affects the recycling of credit and credit creation. It also affects the profitability of the banks because then the banks have to create more provisions against bad loans..
In India the definitions of NPAs has changed over time. According to the Narasimham Committee Report (1991), those assets (overdraft/ cash credit) for which the interest remains due for a period of four quarters (180 days) should be considered as NPAs. Subsequently, this period was reduced and from March 1995 onwards assets for which interest remains unpaid for a period of 90 days were considered as NPAs. Thus, NPA constitutes an important factor in the banking system as it seriously affects the profitability of the banks.
The NPA can broadly be classified into Gross NPA and Net NPA. Gross NPA reflects the quality of the loans made by banks whereas Net NPA shows the actual burden of banks. The banks and the financial institutions have to take the initiative to reduce NPAs in a time bound strategic approach especially of public sector banks because they dominate the banking industries and also since they have much larger NPAs compared with the private sector banks. This raises a concern in the banking industry because it is generally felt that NPAs reduce the profitability of banks, weaken its financial health and erode its solvency (Ka- runakar, 2008).
For the recovery of NPAs a broad framework has evolved for the management of NPAs under which several options are provided for debt recovery and restructuring. However, with the banking reforms in India and adoption of international banking practices, this issue received due focus. Though the issue has received a considerable attention in the post reform period but the ultimate solution has not yet achieved.Thus, this research paper focuses on this severe problem and tries to suggest some remedies to overcome it. The paper consists of secondary data which has been collected from different publications such as the Reserve Bank of India publications, the reports published by commercial banks, various issues of the IBA journal etc. The empirical findings using observation method and statistical tools like correlation, regression and data representation techniques identifies that there is a negative relationship between profitability measure and NPAs.
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