Management of Non Performing Assets (The Significance of Balance Sheet Transparency)

The NPAs, apart from not yielding any revenue locks up a more or less equal amount of outstanding as provision which is going to be culled out of the current diminishing level of profits and retained earnings. It is also ironical that incomes recognized from good performing assets do not become available as lending resources but will have to be used as provisions and support for NPA. Moreover NPA as long as they form part of the bank’s balance sheet exhibit a weak factor. A question that arises is how much risk can a bank afford to take? Recent happenings in the world – like Enron, Worldcom, Xerox – do not give much confidence to banks. In case after case, these giant corporates became bankrupt and failed to provide investors with clearer and more complete information there by introducing a degree of risk that many investors could neither anticipate nor welcome. The history of financial institutions also reveals the fact that the biggest banking failures were due to credit risk. In line with the international practices and as per the recommendations made by the Committee on the Financial System , the Reserve Bank of India has introduced, in a phased manner, asset classification and provisioning for the advances portfolio of the banks so as to move towards greater consistency and transparency in the published accounts. Banks are urged to ensure that while granting loans and advances, realistic repayment schedules may be fixed on the basis of cash flows with borrowers. This would go a long way to facilitate prompt repayment by the borrowers and thus improve the record of recovery in advances.