Monthly Archives: October 2015

banking sectorIntroduction

A major problem being observed all over the world in the banking sector is problem of bad loans. First step of building a stable and strong financial system is to minimize non-performing loans. According to World Bank, non-performing loans as proportion of total loans is 24..6 % for Ireland, 31.3 % for Greece, 9.5 % for Egypt, 6% for Russia, 3.6% for South Africa, 3.2% for USA, 2.9 % for Brazil and 1% for China. Non-performing loans have been huge concern for al the nations across the globe. Since the introduction of financial sector reforms in 1992 and second phase of reforms in 1998, the recovery of non-performing assets is considered as one of the biggest problems for the entire banking industry in India. The high level of Non-Performing Assets (NPAs) taints the overall portfolio but puts a burden on the income statement of banks in the form of higher provisions. The earning capacity and profitability of many banks are adversely affected by the high level of NPAs. Though it is not possible to have zero NPAs, a proper understanding of NPAs is required to manage them, with a view to keeping them under control. To understand NPAs, it becomes imperative to understand the determinants of NPAs both from the regulatory as well as managerial angles. For the regulator, NPAs are crucial since they constitute the first trigger of banking crises. For the bank manager, NPAs reduces the bank’s profitability, as banks are not allowed to book income on NPAs and, at the same time, required to make provision for such accounts as per the regulator’s guidelines. Moreover, managerial and financial resources of the bank are diverted towards resolution of NPA problem causing lost opportunities for more productive use of resources. A bank saddled with NPAs might tend to become risk averse in making new loans, particularly to SMEs. Hence an attempt is made to understand the determinants of the performance of the banks based on asset quality measured by the level of non-performing assets in a bank subsequent to the recommendations made in Narasimham committee report and Global financial turmoil.

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